If inventory is $100 and current assets are $400 with current liabilities $160, what is the quick ratio?

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Multiple Choice

If inventory is $100 and current assets are $400 with current liabilities $160, what is the quick ratio?

Explanation:
The quick ratio measures a company’s ability to cover current liabilities using assets that can be quickly turned into cash. It uses quick assets, which are current assets minus inventory, divided by current liabilities. Here, quick assets = 400 − 100 = 300. Then the quick ratio = 300 ÷ 160 = 1.875. This means the company has about $1.88 of liquid assets for every $1 of short-term obligations, indicating solid short-term liquidity. Inventory is excluded because it might not be sold quickly enough to meet immediate liabilities, so relying on it would overstate liquidity.

The quick ratio measures a company’s ability to cover current liabilities using assets that can be quickly turned into cash. It uses quick assets, which are current assets minus inventory, divided by current liabilities. Here, quick assets = 400 − 100 = 300. Then the quick ratio = 300 ÷ 160 = 1.875. This means the company has about $1.88 of liquid assets for every $1 of short-term obligations, indicating solid short-term liquidity. Inventory is excluded because it might not be sold quickly enough to meet immediate liabilities, so relying on it would overstate liquidity.

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