# quick ratio

common size Balance sheet Cash 5% Accounts Rec 20% Inventory 25% Fixed assets 50% Total assets 700 Short term debt 20% Long term debt 30% Common Equity 50% Debt and Equity 100% The quick ratio is a. 1 b. 1.25 C. 1.50 D. 2.50

Quick ratio is equal to Cash plus Accounts Receivable divided by Current Liabilities. The only current liability here is short-term debt. 25%/20% = 1.25. Inventory is excluded from the quick ratio, since it isn’t always clear that inventory could be rapidly converted into cash. The cash ratio is even more conservative, excluding A/R as well.

I think it is B: cash +A/R = 25% of \$700 = 175 ST Debt = 20% of \$700 = 140 175/140 = 1.25

quick ratio = (cash + accounts receivable) / current liabilites = (5+20)/20 = 1.25 = B edit: agree w/ chebby. He’s too quick

agree with cheby

i don’t know why i added inventory in there

CFALondon0109 Wrote: ------------------------------------------------------- > i don’t know why i added inventory in there Because you were thinking of the Current Ratio. Be prepared to know the difference for the exam, in case, for example, you’re asked to explain how selling \$x worth of inventory for cash affects each ratio (no impact on current ratio, increase of quick ratio).