Kannan Carpets, Inc. has asked you to calculate the company's quick ratio for 2016. All you have is a partial balance sheet and some assumptions. Using the information provided, calculate Kannan's quick ratio for 2016. Gross profit margin = 50%
Inventory turnover (COGS/Inv) = 5
2001 sales = $3,000
Assets Liabilities & Equity
Cash ? Accounts payable $50
AR $40 Accruals ?
Inventory ? Long-term debt $400
Net fixed assets $500 Equity 250
Total assets $900 Total liab. & equity ?
A) 0.2
B) 0.4
C) 0.6
D) 0.8

Question

Quizplus · Accepted Answer

Quick ratio = (Current assets - Inventory) / Current liabilities
We need to first calculate the missing values in the balance sheet:
Cash = 2001 sales x (1 - Gross profit margin) = $1,500
Accruals = Accounts payable x Inventory turnover = $250
Total liab. & equity = Long-term debt + Equity = $650
Now we can calculate the quick ratio:
Quick ratio = (Cash + AR) / (Accounts payable + Accruals)
Quick ratio = ($1,500 + $40) / ($50 + $250) = 0.4