Homework Answers
a)
Current Ratio and Quick Ratio both are liquidity ratios and indicates the company's abilities to meet out its short term liabilities.
Current ratio is calculated by dividing Current assets by Current liabilities.
Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Accounts Receivable + Inventories
Current Assets = 60,000 + 50,000 + 20,000 = 130,000
Current Liabilities = Accounts Payable = 35,000
Current Ratio for 2016 = 130,000 / 35,000 = 3.71 : 1
Quick Ratio = Quick Assets / Current Liabilities
Quick Assets = Cash + Accounts Receivable
Quick Assets = 60,000+50,000 = 110,000
Current Liabilities = Accounts Payable = 35,000
Quick Ratio for 2016 = 110,000/ 35,000 = 3.14 : 1
Note : Quick ratio is calculated by dividing Quick assets by Current liabilities. Quick assets are those current assets which are quick(most liquid) in nature means quickly converted into cash. Inventories and Prepaid Expenses are not considered as Quick Assets as inventories can not converted quickly into cash and prepaid assets are assets but we can not use them for repayment of liabilities. So while calculating Quick ratio we exclude inventories from the total current assets and considered cash and Accounts receivable as Quick assets.
b)
Current Ratio Interpretation
The ideal current ratio is 2:1. All construction company's current ratio is 3.71 :1 which is greater than the ideal ratio indicates that company has sufficient available current assets to discharge its current liabilities. This company can easily meet out its short term obligation.
Quick Ratio Interpretation
The ideal Quick ratio is 1:1. All construction company's current ratio is 3.14 :1 which is much greater than the ideal ratio indicates that the company can easily meet out its current liabilities with its most liquid assets or we can say Quick assets.It indicates that its Quick Assets are 3.14 times than its current liabilities.
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