8RQ - Horngren'S Financial And Managerial Accounting

Question

Briefly describe the ratios that can be used to evaluate a company’s ability to paycurrent liabilities.

 

Step-by-Step Solution

Answer

Working capital,

Current ratio,

Quick ratio

Step 1: Meaning of Ratio

The ratio indicates the association between the two numbers or quantities and shows how one element of the ratio relates to the other.

Step 2: Explanation of some ratios used by companies to evaluate their ability to pay current liabilities

1. Working capitalindicates the amount of current assets the business needs to do day-to-day operations.

Formula:

 $\text{Working} \text{capital}=\text{Current} \text{Assets}-\text{Current} \text{liabilities}$

 

2. The current ratioindicates the ability of the business to manage its current liabilities with the current assets.

Formula:

 $\text{Current} \text{ratio}=\frac{\text{Current} \text{Assets}}{\text{Current} \text{liabilities}}$

3. A quick ratiois a type of liquidity ratio used by companies to calculate their ability or how efficiently they are using the quick assets to meet or pay off their current liabilities.

In simple words, we can say that Quick assets convert them self quickly intocash or cash equivalents.

Formula:

 $\text{Quick} \text{ratio}=\frac{\text{Cash}+\text{Marketable} \text{securities}+\text{Net} \text{receivables}}{\text{Current} \text{Liabilities}}$