Question
The following are current assets and current liabilities
Current assets
Inventory: K 210,000
Debtors: K 100, 000
Provision for Doubtful Debts: K 10,000
Bills receivables: K 70,000
Marketable securities: K 60,000
Prepaid expenses: K 20,000
Bank: K 60,000
Current liabilities
Bank overdraft: K 80,000
Outstanding expenses: K 30,000
Sundry creditors: K 90,000
Provision for tax: K 25, 000
Proposed Dividend: K 45,000
Question 1
Base on above, calculate the current ratio.
B) elaborate on your answer in question 1.
C) calculate the quick ratio.
D) comment on your answer in C
Current assets
Inventory: K 210,000
Debtors: K 100, 000
Provision for Doubtful Debts: K 10,000
Bills receivables: K 70,000
Marketable securities: K 60,000
Prepaid expenses: K 20,000
Bank: K 60,000
Current liabilities
Bank overdraft: K 80,000
Outstanding expenses: K 30,000
Sundry creditors: K 90,000
Provision for tax: K 25, 000
Proposed Dividend: K 45,000
Question 1
Base on above, calculate the current ratio.
B) elaborate on your answer in question 1.
C) calculate the quick ratio.
D) comment on your answer in C
Answers
GPT-4o mini
To calculate the current ratio and the quick ratio, we will first determine the total current assets and total current liabilities from the data provided.
### A) Current Ratio Calculation
**Current Assets:**
- Inventory: K 210,000
- Debtors: K 100,000
- Provision for Doubtful Debts: K 10,000 (This will not be included in current assets calculation)
- Bills Receivables: K 70,000
- Marketable Securities: K 60,000
- Prepaid Expenses: K 20,000
- Bank: K 60,000
**Total Current Assets Calculation:**
\[
\text{Total Current Assets} = \text{Inventory} + \text{Debtors} + \text{Bills Receivables} + \text{Marketable Securities} + \text{Prepaid Expenses} + \text{Bank}
\]
\[
= K 210,000 + K 100,000 + K 70,000 + K 60,000 + K 20,000 + K 60,000 = K 520,000
\]
**Current Liabilities:**
- Bank Overdraft: K 80,000
- Outstanding Expenses: K 30,000
- Sundry Creditors: K 90,000
- Provision for Tax: K 25,000
- Proposed Dividend: K 45,000
**Total Current Liabilities Calculation:**
\[
\text{Total Current Liabilities} = \text{Bank Overdraft} + \text{Outstanding Expenses} + \text{Sundry Creditors} + \text{Provision for Tax} + \text{Proposed Dividend}
\]
\[
= K 80,000 + K 30,000 + K 90,000 + K 25,000 + K 45,000 = K 270,000
\]
**Current Ratio Calculation:**
\[
\text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}} = \frac{K 520,000}{K 270,000} \approx 1.93
\]
### B) Explanation of Current Ratio
A current ratio of approximately 1.93 suggests that the company has K 1.93 in current assets for every K 1 of current liabilities. This is a favorable condition, indicating that the company is in a good position to meet its short-term obligations. A current ratio above 1 generally indicates a healthy liquidity position, meaning the company should be able to cover its short-term liabilities comfortably. However, it's important to compare this ratio with industry standards, as what constitutes a "good" ratio can vary across different sectors.
### C) Quick Ratio Calculation
**Quick Assets:**
Quick Assets are calculated by excluding inventory and prepaid expenses from current assets:
- Debtors: K 100,000
- Bills Receivables: K 70,000
- Marketable Securities: K 60,000
- Bank: K 60,000
**Total Quick Assets Calculation:**
\[
\text{Total Quick Assets} = \text{Debtors} + \text{Bills Receivables} + \text{Marketable Securities} + \text{Bank}
\]
\[
= K 100,000 + K 70,000 + K 60,000 + K 60,000 = K 290,000
\]
**Quick Ratio Calculation:**
\[
\text{Quick Ratio} = \frac{\text{Total Quick Assets}}{\text{Total Current Liabilities}} = \frac{K 290,000}{K 270,000} \approx 1.07
\]
### D) Comment on Quick Ratio
A quick ratio of approximately 1.07 indicates that the company has K 1.07 in liquid assets available to cover each K 1 of current liabilities, which is also considered to be a healthy liquidity position. A quick ratio above 1 suggests an ability to meet short-term liabilities without relying on the liquidation of inventory, which is less liquid. However, a quick ratio that is significantly lower than the current ratio indicates that a portion of the current assets is tied up in inventory or prepaid expenses, which may take longer to convert to cash. Depending on the nature of the business, having a lower quick ratio can be acceptable, especially in industries where inventory turnover is steady.
### A) Current Ratio Calculation
**Current Assets:**
- Inventory: K 210,000
- Debtors: K 100,000
- Provision for Doubtful Debts: K 10,000 (This will not be included in current assets calculation)
- Bills Receivables: K 70,000
- Marketable Securities: K 60,000
- Prepaid Expenses: K 20,000
- Bank: K 60,000
**Total Current Assets Calculation:**
\[
\text{Total Current Assets} = \text{Inventory} + \text{Debtors} + \text{Bills Receivables} + \text{Marketable Securities} + \text{Prepaid Expenses} + \text{Bank}
\]
\[
= K 210,000 + K 100,000 + K 70,000 + K 60,000 + K 20,000 + K 60,000 = K 520,000
\]
**Current Liabilities:**
- Bank Overdraft: K 80,000
- Outstanding Expenses: K 30,000
- Sundry Creditors: K 90,000
- Provision for Tax: K 25,000
- Proposed Dividend: K 45,000
**Total Current Liabilities Calculation:**
\[
\text{Total Current Liabilities} = \text{Bank Overdraft} + \text{Outstanding Expenses} + \text{Sundry Creditors} + \text{Provision for Tax} + \text{Proposed Dividend}
\]
\[
= K 80,000 + K 30,000 + K 90,000 + K 25,000 + K 45,000 = K 270,000
\]
**Current Ratio Calculation:**
\[
\text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}} = \frac{K 520,000}{K 270,000} \approx 1.93
\]
### B) Explanation of Current Ratio
A current ratio of approximately 1.93 suggests that the company has K 1.93 in current assets for every K 1 of current liabilities. This is a favorable condition, indicating that the company is in a good position to meet its short-term obligations. A current ratio above 1 generally indicates a healthy liquidity position, meaning the company should be able to cover its short-term liabilities comfortably. However, it's important to compare this ratio with industry standards, as what constitutes a "good" ratio can vary across different sectors.
### C) Quick Ratio Calculation
**Quick Assets:**
Quick Assets are calculated by excluding inventory and prepaid expenses from current assets:
- Debtors: K 100,000
- Bills Receivables: K 70,000
- Marketable Securities: K 60,000
- Bank: K 60,000
**Total Quick Assets Calculation:**
\[
\text{Total Quick Assets} = \text{Debtors} + \text{Bills Receivables} + \text{Marketable Securities} + \text{Bank}
\]
\[
= K 100,000 + K 70,000 + K 60,000 + K 60,000 = K 290,000
\]
**Quick Ratio Calculation:**
\[
\text{Quick Ratio} = \frac{\text{Total Quick Assets}}{\text{Total Current Liabilities}} = \frac{K 290,000}{K 270,000} \approx 1.07
\]
### D) Comment on Quick Ratio
A quick ratio of approximately 1.07 indicates that the company has K 1.07 in liquid assets available to cover each K 1 of current liabilities, which is also considered to be a healthy liquidity position. A quick ratio above 1 suggests an ability to meet short-term liabilities without relying on the liquidation of inventory, which is less liquid. However, a quick ratio that is significantly lower than the current ratio indicates that a portion of the current assets is tied up in inventory or prepaid expenses, which may take longer to convert to cash. Depending on the nature of the business, having a lower quick ratio can be acceptable, especially in industries where inventory turnover is steady.