The following items are reported on a company's balance sheet: Cash $400,000 Marketable securities 50,000 Accounts receivable 150,000 Inventory 200,000 Accounts payable 250,000 Determine the (a) current ratio, and (b) quick ratio. Round your answers to one decimal place.

A) Current Ratio = Total Current Assets: Total Current Liabilities, which is 800,000 : 250,000, = 3.2 : 1

B) Quick Ratio = Total Current Assets minus Inventory : Total Current Liabilities, which is 600,000 : 250,000, = 2.4 : 1

Explanation:

The Current Ratio is a liquidity ratio that explains how a company can use its current assets to manage its current liabilities.  The ratio compares the total current assets to the current liabilities.  This ratio is also sometimes called the working capital ratio.

The Quick Ratio is also a liquidity ratio that measures a company's ability to offset current liabilities by excluding the Inventory value.  This ratio excludes inventory because inventory is not regarded as a near cash current asset due to the time it could take to turn it over to cash unlike all other current assets.

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