CFA Level ICorporate IssuersMedium
A company reports current assets of $500,000, which include $200,000 of inventory and $20,000 of prepaid expenses. Current liabilities total $250,000. What is the company's quick ratio?
- A0.88
- B1.12
- C1.20
- D2.00
Show answer & explanationAnswer & explanation
Correct answer: B. 1.12
Quick assets = Current assets − Inventory − Prepaid expenses = 500,000 − 200,000 − 20,000 = 280,000. Quick ratio = 280,000 / 250,000 = 1.12.
Why the other options are wrong
- A. Incorrectly subtracts an additional amount beyond inventory and prepaids.
- C. Excludes only inventory but not prepaid expenses.
- D. This is the current ratio (500,000/250,000), not the quick ratio.
Quick Ratio (Acid-Test Ratio)
A liquidity ratio that measures a firm's ability to meet short-term obligations using its most liquid assets, excluding inventory and prepaid items.
- Quick ratio = (Current assets − Inventory − Prepaid expenses) / Current liabilities
- More conservative than the current ratio
- Higher ratio indicates stronger short-term liquidity
Memory trick: Quick assets are cash-like, so strip out inventory and prepaids