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The following items are reported on a company's balance sheet: Cash $210,000 Marketable securities 120,000 Accounts receivable (net) 110,000 Inventory 160,000 Accounts payable 200,000 Determine (a) the current ratio and (b) the quick ratio. Round your answers to one decimal place.

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Answer:

a. The current ratio: 3.0

b. The quick ratio: 2.2

Explanation:

a. The current ratio is calculated by using following formula:

Current Ratio = Current Assets / Current Liabilities

In the company,

Current Assets = Cash + Marketable securities + Accounts receivable + Inventory = $210,000 + $120,000 + $110,000 + $160,000 = $600,000

Current Liabilities = Accounts payable = $200,000

Current Ratio = $600,000/$200,000 = 3.0

b. The quick ratio is calculated by the following formula:

Quick ratio = (Cash & equivalents + Short Term investments + Accounts receivable)/Current Liabilities  = ($210,000 + $120,000 + $110,00)/$200,000 = 2.2

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