Quick Ratio Calculation Examples Help

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What is Quick Ratio?

 
Quick Ratio or Acid Test Ratio, shows the ratio of cash and other liquid resources of an organization in comparison to its current liabilities. The formula for calculation of Quick Ratio is as follows
 
Quick Ratio = (Cash in hand + Cash at Bank + Receivables + Marketable Securities)/ Current Liabilities
Quick ratio shows the extent of cash and other current assets that are readily convertible into cash in comparison to the short-term obligations of an organization. A quick ratio of 0.5 is considered healthy.
 
Quick ratio may therefore alternatively be calculated as follows
Quick Ratio =(Current Assets – Inventory – Advances – Prepayments)/Current Liabilities
 

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Quick Ratio Calculation Examples Explanation

 
The Quick Ratio Calculation can be well understood with the help of an example.
Example: A company has the Balance Sheet as on 31stDecember 2012

     

  • Non-Current Assets

 
Goodwill $7500
Fixed Assets $7500

     

  • Current Assets

 
Cash in hand $2500
Cash in bank $5000
Short term investments $7500
Inventory $2500
Receivable $10000

     

  • Current Liabilities

 
Trade payables $10000
Income tax payables $6000
Non-Current Liabilities
Bank Loan $5000
Deferred tax payable $2500
 
Note 1:Short term investments include treasury bills amounting $4500 and investment in unlisted shares amounting $3000.
Solution: Quick ratio will be calculated as follows
Quick Ratio = (Cash in hand + Cash at Bank + Receivables + Marketable Securities)/Current Liabilities
= (25 + 50 + 45 + 100)/160 = 1.37
 
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