EX 11-22 Quick ratio
CCB Co. had the following current assets and liabilities for two comparative years:
Dec. 31, 2012 Dec. 31, 2011
Current assets: Cash $ 506,000 $ 524,000 Accounts receivable 354,000 364,000 Inventory 240,000 200,000 Total current assets $1,100,000 $1,088,000 Current liabilities: Current portion of long-term debt $ 160,000 $ 120,000 Accounts payable 265,000 220,000 Accrued and other current liabilities 435,000 400,000 Total current liabilities $ 860,000 $ 740,000
a. Determine the quick ratio for December 31, 2012 and 2011.
b. Interpret the change in the quick ratio between the two balance sheet dates.
Answer:
a. Quick Ratio =
sLiabilitie Current Assets Quick
December 31, 2011:
$740,000 $364,000+$524,000
= 1.2
December 31, 2012:
$860,000 $354,000+$506,000
= 1.0
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, 2012, is not yet at an alarming level. However, the trend suggests that the firm’s current asset (working capital) management should be watched closely.
Dec. 31, 2012 Dec. 31, 2011
Current assets: Cash $ 506,000 $ 524,000 Accounts receivable 354,000 364,000 Inventory 240,000 200,000 Total current assets $1,100,000 $1,088,000 Current liabilities: Current portion of long-term debt $ 160,000 $ 120,000 Accounts payable 265,000 220,000 Accrued and other current liabilities 435,000 400,000 Total current liabilities $ 860,000 $ 740,000
a. Determine the quick ratio for December 31, 2012 and 2011.
b. Interpret the change in the quick ratio between the two balance sheet dates.
Answer:
a. Quick Ratio =
sLiabilitie Current Assets Quick
December 31, 2011:
$740,000 $364,000+$524,000
= 1.2
December 31, 2012:
$860,000 $354,000+$506,000
= 1.0
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, 2012, is not yet at an alarming level. However, the trend suggests that the firm’s current asset (working capital) management should be watched closely.
