Sunday, April 20, 2008

Calculate Current Ratio and Quick Ratio

A shoe manufacturing company currently has a current ratio of 2.30 times on current liabilities of $800,000. If the company has $300,000 worth of inventory, what is the firm's quick ratio?

To calculate quick ratio, you first need to calculate current assets. To do this, you need to understand the relationship between a firm's current ratio and its current assets and current liabilities. The current ratio of 2.30 times means the firm's current assets are 2.30 times its current liabilities. Therefore, the current assets can be found by multiplying the current ratio by the current liabilities, as follows:

Current Ratio Equation:
Current Ratio = Current Assets / Current Liabilities

Formula to Solve:
2.30 times = Current Assets / $800,000
$1,840,000 = Current Assets

The quick ratio is very similar to the current ratio, yet it is different because it takes inventories out of the current assets. Therefore, the quick ratio is calculated as follows:

Quick Ratio Equation:
Quick Ratio = (Current Assets - Inventories) / Current Liabilities

Formula to Solve:
= ($1,840,000 - $300,000) / $800,000
= $1,540,000 / $800,000
= 1.9250 times, or 1.93 times

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