Question 1
Multiple ChoiceAn analyst reviews the following balance sheet information for three companies:
Item (£ Thousands) | Company A | Company B | Company C |
|---|---|---|---|
Cash | 90 | 120 | 60 |
Marketable Securities | 10 | 30 | 20 |
Accounts Receivable | 200 | 250 | 180 |
Inventory | 400 | 300 | 350 |
Prepaid Expenses | 30 | 10 | 0 |
Accounts Payable | 220 | 260 | 200 |
Accrued Expenses | 30 | 40 | 20 |
Based on the quick ratio, which company is the most liquid?
Explanation
The quick ratio measures a company’s ability to cover short-term obligations using only the most liquid current assets (excluding inventory and prepaid expenses).
Quick Ratio Formula:
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ (Accounts Payable + Accrued Expenses)
Company A:
Quick Assets = 90 + 10 + 200 = 300
Current Liabilities = 220 + 30 = 250
Quick Ratio = 300 ÷ 250 = 1.20
Company B:
Quick Assets = 120 + 30 + 250 = 400
Current Liabilities = 260 + 40 = 300
Quick Ratio = 400 ÷ 300 = 1.33
Company C:
Quick Assets = 60 + 20 + 180 = 260
Current Liabilities = 200 + 20 = 220
Quick Ratio = 260 ÷ 220 = 1.18