Excluding inventory from current assets

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Question

The quick ratio (also known as the acid-test ratio) is a more stringent measure of a company's liquidity, excluding inventory from current assets. The formula for the quick ratio is: Quick Ratio = Total Current Assets - Inventory Total Current Liabilities Quick Ratio= Total Current Liabilities Total Current Assets-Inventory ? In this case, for Steve's Tree Farm: Quick Ratio = $ 205 , 000 , 000 - $ 111 , 000 , 000 $ 123 , 000 , 000 Quick Ratio= $123,000,000 $205,000,000-$111,000,000 ? Quick Ratio ≈ 0.837 Quick Ratio≈0.837 Since the industry average for a quick ratio is 1.50, and Steve's Tree Farm has a quick ratio of approximately 0.837, it suggests that Steve's Tree Farm may be doing worse than its competitors in terms of short-term liquidity. A quick ratio below 1 may indicate potential difficulties in meeting short-term obligations without relying on selling inventory. It's important to note that ideal quick ratios can vary between industries, so it's useful to compare a company's ratio to the industry average for a more context-specific analysis.

Reference no: EM133971242

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