The following table contains selected financial information fo...

Question

The following table contains selected financial information for Tougher Question, Inc.

Table showing financial data for Tougher Question, Inc. for quick ratio calculation.

Calculate the quick ratio for TQ, Inc.

Accepted Answer

Alright. So I'm guessing you guys tried the practice problem. Let's dive right in. So the following table contains selected information for tougher question, Inc. Alright? So they're asking us to calculate the quick ratio again, but they gave us the information in a different way, right? They listed out a bunch of accounts. We gotta figure out which ones are current well, our quick assets, right? Not all of our current assets. Our quick assets that will be in our numerator and then our denominator will be all of our current liabilities. So let's go ahead and find those. Let's start with our quick assets. Now this isn't a term that's used so often. Quick assets, you might not see that. I'm not sure that it's such a technical term, but it's what we're talking about in the quick ratio, right? We're talking about those highly liquid assets. So we're looking for cash, our short term investments and our accounts receivable. So let's find those real quick. So here's cash, quick asset. Machinery, no. There's accounts receivable and then short term debt land. I don't see anything about short term investments there. So since they're not listed, well, then we don't have any short term investments, and then we're done with our quick assets. We see that we've got 45,000 in cash and 10,000 in, accounts receivable. So our quick assets total 55,000. Cool. Easy enough. Now, let's find all of our current liabilities. So remember, that's gonna be our denominator here where the quick assets are our numerator. Liabilities. It's hard to talk and write at the same time. So let's find all of those current liabilities that are gonna be in our denominator. Alright? So what do we got? Machinery, that's an asset, right? Short term debt, is that a current liability? It is, right? Short term debt. That's short term. So it's debt is a liability, something we're gonna have to pay out and we're paying it out in the short term. So it's a current liability. Land, that's an asset, right? So it's not a liability and it's a long term asset. Accrued expenses, those are current liabilities, right? These are accruals that we made maybe through adjusting entries, some expenses that we've receive the benefit, but haven't paid them out yet. So that's a current liability. We're gonna have to pay that out soon. Inventory, that's a current asset. Right? It is a current asset, but it wasn't a quick asset. So that's why it doesn't get used here. How about accounts payable? That is a current liability, right? That's one of our most common current liabilities that we always see. Common stock, nope, that's equity. Bonds payable. Now bonds payable, these could be current liabilities, but they would have to specifically let us know that they're due soon. Because in general, bonds payable is some sort of long term liability where we sold some bonds, we got money for it and we're gonna have to pay it back usually in 10 years, 20 years. It's usually some long period of time, but sometimes that time period is coming up. Maybe we did it 20 years ago and that time is coming around the corner. They could be current, right? But they would have to tell us specifically in the problem. So those are long term. Prepaid expenses, again those are current assets, but they are not those quick assets we're looking for. And then retained earnings, so that's an equity account as well. So that's good. We found all of our current liabilities. Let's add them up. 40,000 in short term debt, 35,000 in accrued expenses, and 30,000 in our accounts payable. So let's add all of those up and we get a 105,000. Right? We've got a 105,000 in current liabilities, so all that's left is to calculate our quick ratio. Let's do that over here. Quick ratio, remember, that's our quick assets that we calculated as 55,000 divided by our current liabilities, a 105,000 right there. Okay. So let's do it. 55 divided by 105. Wow, we got a pretty little quick ratio here, right? 0.52. Alright? So this is probably showing that this company might have some difficulty paying off its current liabilities, right? When we think about the current ratio, what we'd be adding in that inventory, those prepaid expenses, but that's not as liquid as what we dealt with here. So since we've got this stricter, stricter amount of assets that we've put as the highly liquid ones, well, we ended up with a pretty low quick ratio here. So this could be a red flag that they're gonna have some liquidity problems in the future. Alright? Let's go ahead and move on to the next video.

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The following table contains selected financial information for Tougher Question, Inc.

Calculate the quick ratio for TQ, Inc.

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The following table contains selected financial information for Tougher Question, Inc.Calculate the quick ratio for TQ, Inc.

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The following table contains selected financial information for Tougher Question, Inc.

Calculate the quick ratio for TQ, Inc.