ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements
Gamma Co has current assets of $540,000, which include inventory of $180,000, and current liabilities of $270,000. What are the current ratio and the quick (acid test) ratio?
The current ratio is 2.0:1 because current assets of $540,000 divided by current liabilities of $270,000 equals two. The quick ratio removes inventory first, giving $360,000 divided by $270,000, which is 1.33:1.
- ACurrent ratio 2.0:1; quick ratio 1.33:1Correct
- BCurrent ratio 2.0:1; quick ratio 0.67:1
- CCurrent ratio 3.0:1; quick ratio 1.33:1
- DCurrent ratio 1.33:1; quick ratio 2.0:1
Explanation
Current ratio = 540,000/270,000 = 2.0:1. Quick ratio excludes inventory: (540,000 - 180,000)/270,000 = 360,000/270,000 = 1.33:1. Option 2 wrongly divides inventory alone by current liabilities (0.67).
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