PE 11-8A Quick ratio

Grangel Company reported the following current assets and liabilities for December 31, 2012 and 2011:


Dec. 31, 2012 Dec. 31, 2011 Cash $  620 $  560 Temporary investments 1,330 1,250 Accounts receivable 850 830 Inventory 1,000 1,000 Accounts payable 2,800 2,200 



a. Compute the quick ratio for December 31, 2012 and 2011.
b. Interpret the company’s quick ratio. Is the quick ratio improving or declining?

Answer:
a.
December 31, 2012
Quick Ratio = Quick Assets ÷ Current Liabilities  
Quick Ratio = ($620 + $1,330 + $850) ÷ $2,800
Quick Ratio = 1.0  

December 31, 2011
Quick Ratio = Quick Assets ÷ Current Liabilities  
Quick Ratio = ($560 + $1,250 + $830) ÷ $2,200
Quick Ratio = 1.2

b. The quick ratio of Grangel Company has declined from 1.2 in 2011 to 1.0 in 2012. This decrease is the result of a large increase in accounts payable compared to relatively smaller increases in the three types of quick assets (cash, short-term investments, and accounts receivable).

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