Dec. 31, 2014 Dec. 31, 2013
Cash $ 650 $ 680
Temporary investments 1,500 1,550
Accounts receivable 700 770
Inventory 1,250 1,400
Accounts payable 2,375 2,000
a. Compute the quick ratio for December 31, 2014 and 2013.
b. Interpret the company’s quick ratio. Is the quick ratio improving or declining?
Answer:
a.
December 31, 2014
Quick Ratio = Quick Assets ÷ Current Liabilities
Quick Ratio = ($650 + $1,500 + $700) ÷ $2,375
Quick Ratio = 1.2
December 31, 2013
Quick Ratio = Quick Assets ÷ Current Liabilities
Quick Ratio = ($680 + $1,550 + $770) ÷ $2,000
Quick Ratio = 1.5
b. The quick ratio of Nabors Company has declined from 1.5 in 2013 to 1.2 in 2014. This decrease is the result of a large increase in accounts payable compared to decreases in the three types of quick assets (cash, temporary investments, and accounts receivable).