Question

Central BBQ operates membership warehouses that offer a selection of prime meats and sides to its employees. in November 2013 the company operated 592 warehouses including 429 in the United States and Guam, 82 in Italy, 32 in Argentina, 22 in Europe, 9 in Australia, 3 in China. Assume the following Data which relates to Central BBQs Financial Statements

a. Current Ratio of 1.2

b. Quick Ratio of .8

c. Current Liabilities of $500,000

Compute the Inventory for Costco Wholesale

Discuss why the Quick Ratio is regarded by many as a more important ratio when compared to the current ratio

Answer 1

Answer : Calculation of Amount of Inventory :

Given ,

Current ratio = Current Assets / Current liabilities

1.2 = Current Assets / 500,000

==> Current Assets = 500,000 * 1.2

= 600,000

Quick ratio = (Current Assets - Inventory) / Current liabilities

0.80 = (Current Assets - Inventory) / 500,000

600,000 - Inventory = 500,000 * 0.80

600,000 - Inventory = 400,000

==> Inventory = 600,000 - 400,000

= 200,000

Quick ratio provides more clear approach on company’s ability to meet current Liabilities with liquid assets because Current ratio includes all the current assets but quick ratio not include inventory & other current assets which takes time to easily convert into cash . Therefore the quick ratio emphasises on the company’s liquidity aspect and considered as more superior measure than current ratio.