The quick ratio is a measure of a company's short-term liquidity position and is calculated using the following formula:
\[ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} \]
In this case, we need to consider cash, temporary investments, and accounts receivable as the quick assets. We will exclude inventory from current assets for this calculation.
Let's compute the quick ratio for each year:
For December 31, 20Y4:
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Current Assets:
- Cash: $1,140
- Temporary investments: $1,100
- Accounts receivable: $800
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Total Quick Assets: \[ \text{Total Quick Assets} = 1,140 + 1,100 + 800 = 3,040 \]
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Current Liabilities:
- Accounts payable: $1,900
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Quick Ratio Calculation: \[ \text{Quick Ratio for 20Y4} = \frac{3,040}{1,900} \approx 1.6 \]
For December 31, 20Y3:
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Current Assets:
- Cash: $1,260
- Temporary investments: $1,400
- Accounts receivable: $940
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Total Quick Assets: \[ \text{Total Quick Assets} = 1,260 + 1,400 + 940 = 3,600 \]
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Current Liabilities:
- Accounts payable: $2,400
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Quick Ratio Calculation: \[ \text{Quick Ratio for 20Y3} = \frac{3,600}{2,400} = 1.5 \]
Results:
- Quick Ratio for 20Y4: 1.6
- Quick Ratio for 20Y3: 1.5
b. Is the quick ratio improving or declining?
The quick ratio increased from 1.5 in 20Y3 to 1.6 in 20Y4. Therefore, the quick ratio is improving.
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