Dec. 31, 2014 Dec. 31, 2013
Current assets:
Cash $ 486,000 $ 500,000
Accounts receivable 210,000 200,000
Inventory 375,000 350,000
Total current assets $1,071,000 $1,050,000
Current liabilities:
Current portion of long-term debt $ 145,000 $ 110,000
Accounts payable 175,000 150,000
Accrued and other current liabilities 260,000 240,000
Total current liabilities $ 580,000 $ 500,000
a. Determine the quick ratio for December 31, 2014 and 2013.
b. Interpret the change in the quick ratio between the two balance sheet dates.
Answer:
a. Quick Ratio =
December 31, 2013:
December 31, 2014:
Quick Assets
Current Liabilities
$500,000 + $200,000
$500,000
$486,000 + $210,000
$580,000
= 1.4
= 1.2
b. The quick ratio decreased between the two balance sheet dates. The major reason is a significant increase in inventory which likely drove the increase in accounts payable. Cash also declined, possibly to purchase the inventory. As a result, quick assets actually declined, while the current liabilities increased. The quick ratio for December 31, 2014, is not yet at an alarming level. However, the trend suggests that the firm’s current asset (working capital) management should be watched closely.