Quick Ratio Grangel Company reported the following current assets and liabilitie
ID: 2599759 • Letter: Q
Question
Quick Ratio Grangel Company reported the following current assets and liabilities for December 31 for two recent years: Dec. 31, Current Year Dec. 31, Previous Year Cash Temporary investments Accounts receivable Inventory Accounts payable a. Compute the quick ratio on December 31 of both years. If required, round your answers to one decimal place $790 1,730 1,440 1,300 3,600 $590 1,320 890 1,260 2,800 Quick Ratio December 31, current year December 31, previous year b. Is the quick ratio improving or declining?Explanation / Answer
Answer:-a)- Acid-test (Quick ratio):- Current assets-Inventory-Prepaid expenses/Current Liabilities
December 31, current year =$5260-$1300/$3600
=$3960/$3600 = 1.1 times
December 31, previous year =$4060-$1260/$2800
=$2800/$2800 = 1 times
b)-Quick ratio is considered a more reliable test of short-term solvency than current ratio because it shows the ability of the business to pay short term debts immediately.
Higher quick ratios are more favourable for companies because it shows there are more quick assets than current liabilities. A company with a quick ratio of 1 indicates that quick assets equal current assets.
Hence the quick ratio is improving compare to previous ratio.
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