A company has current assets of £120,000, of which inventories are £45,000, and current liabilities of £80,000. What are the current ratio and the quick (acid test) ratio?
Answer and explanation
Correct answer: D. Current ratio 1.50 and quick ratio 0.94
- Step 1: Current ratio = current assets ÷ current liabilities = £120,000 ÷ £80,000 = 1.50.
- Step 2: Quick ratio excludes inventories: (£120,000 − £45,000) ÷ £80,000 = 0.94.
Answer
Current ratio 1.50 and quick ratio 0.94.
Why not the others: Current ratio 1.50 and quick ratio 1.50: The quick ratio excludes inventories from current assets. Current ratio 0.94 and quick ratio 1.50: The two ratios have been swapped. Current ratio 2.67 and quick ratio 1.50: This divides current assets by only part of liabilities and so does not match the figures given.
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