Asked by Janvier Daffeed on Jul 16, 2024
Verified
A Montreal firm has current liabilities of $250, a current ratio of 1.2, and a quick ratio of 0.81. Calculate the level of inventory for this firm.
A) $45
B) $50
C) $97.5
D) $120
E) $200
Quick Ratio
A financial metric that measures a company’s ability to meet its short-term obligations with its most liquid assets.
Current Ratio
A financial metric assessing a firm's capacity to meet its obligations due within the next year by dividing its current assets by its current liabilities.
Inventory
The total amount of goods and materials held by a company intended for sale or production.
- Evaluate firm's liquidity through current ratio and quick ratio calculations.
Verified Answer
FV
Fanny VelazquezJul 17, 2024
Final Answer :
C
Explanation :
The current ratio is calculated as current assets divided by current liabilities. Given a current ratio of 1.2 and current liabilities of $250, the current assets are $250 * 1.2 = $300. The quick ratio is calculated as (current assets - inventory) / current liabilities. Given a quick ratio of 0.81, we have ($300 - inventory) / $250 = 0.81. Solving for inventory, inventory = $300 - ($250 * 0.81) = $300 - $202.5 = $97.5.
Learning Objectives
- Evaluate firm's liquidity through current ratio and quick ratio calculations.