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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

Tamsin Co's statement of financial position at 31 December 20X2 shows current assets of $360,000, of which inventory is $120,000, and current liabilities of $200,000. At 31 December 20X1 the current ratio was 1.5 and the quick ratio was 1.0. Which statement is correct?

Both liquidity ratios improved. The current ratio is $360,000 divided by $200,000, which is 1.8, up from 1.5. The quick ratio excludes inventory: $240,000 divided by $200,000 gives 1.2, up from 1.0, so the answer is that both rose.

  1. ACurrent ratio rose to 1.8 and quick ratio fell to 1.0
  2. BCurrent ratio rose to 1.8 and quick ratio rose to 1.2Correct
  3. CCurrent ratio fell to 1.2 and quick ratio fell to 0.8
  4. DCurrent ratio rose to 1.8 and quick ratio fell to 0.6

Explanation

Current ratio = 360/200 = 1.8, up from 1.5. Quick ratio = (360-120)/200 = 240/200 = 1.2, up from 1.0. The option with 0.6 deducts inventory twice (360-240)/200, a mistaken double deduction.

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