WGU C201 BUSINESS ACUMEN
CHAPTER 15 & 16: ACCOUNTING AND
FINANCIAL STATEMENTS – RATIOS
WITH COMPLETE SOLUTIONS
GUARANTEED SUCCESS!!!
Liquidity Ratio Analysis
Question: What is the formula for calculating the Current Ratio, and what
does it measure?
Answer: The Current Ratio is determined by dividing total current assets by
total current liabilities. It evaluates a company's ability to cover its short-term
debts with its short-term assets.
$$Current\ Ratio = \frac{Current\ Assets}{Current\ Liabilities}$$
✔️✔️
Question: How do you calculate the Acid Test (Quick) Ratio, and why is
inventory excluded?
Answer: The Acid Test Ratio is calculated by subtracting inventory from
current assets and then dividing the remainder by current liabilities. Inventory is
removed because it is often the least liquid current asset and can be difficult to
convert into cash quickly.
$$Quick\ Ratio = \frac{Current\ Assets - Inventory}{Current\ Liabilities}$$
✔️✔️
Question: Using the Acid Test formula, what is the ratio for a company with
$\$250$ in assets, $\$20$ in inventory, and $\$100$ in liabilities?
Answer: First, subtract the inventory from the assets ($\$250 - \$20 = \$230$).
Then, divide that figure by the liabilities ($\$230 / \$100 = 2.3$). This indicates
that the company has $\$2.30$ in highly liquid assets available to cover every
$\$1.00$ of short-term debt.
CHAPTER 15 & 16: ACCOUNTING AND
FINANCIAL STATEMENTS – RATIOS
WITH COMPLETE SOLUTIONS
GUARANTEED SUCCESS!!!
Liquidity Ratio Analysis
Question: What is the formula for calculating the Current Ratio, and what
does it measure?
Answer: The Current Ratio is determined by dividing total current assets by
total current liabilities. It evaluates a company's ability to cover its short-term
debts with its short-term assets.
$$Current\ Ratio = \frac{Current\ Assets}{Current\ Liabilities}$$
✔️✔️
Question: How do you calculate the Acid Test (Quick) Ratio, and why is
inventory excluded?
Answer: The Acid Test Ratio is calculated by subtracting inventory from
current assets and then dividing the remainder by current liabilities. Inventory is
removed because it is often the least liquid current asset and can be difficult to
convert into cash quickly.
$$Quick\ Ratio = \frac{Current\ Assets - Inventory}{Current\ Liabilities}$$
✔️✔️
Question: Using the Acid Test formula, what is the ratio for a company with
$\$250$ in assets, $\$20$ in inventory, and $\$100$ in liabilities?
Answer: First, subtract the inventory from the assets ($\$250 - \$20 = \$230$).
Then, divide that figure by the liabilities ($\$230 / \$100 = 2.3$). This indicates
that the company has $\$2.30$ in highly liquid assets available to cover every
$\$1.00$ of short-term debt.
