If the current ratio for an entity is equal to its acid test (that is, the quick ratio), then 1 answer below »

If the current ratio for an entity is equal to its acid test (that is, the quick ratio), then

(A) the current ratio must be greater than one

(B) the entity does not carry any inventory

(C) trade receivables plus cash is greater than trade payables minus inventory

(D) working capital is positive

‘Although many financial analysts use the current ratio to assess the liquidity position of firms, it is essential that care is taken in reaching any decision.’ The following information has been obtained from two small entities regarding the working capital that is being used at 30 September 2003.

 

 

Entity A

Entity B

 

$

$

Inventory’s

6,000

20,000

Trade receivables

5,800

10,000

Cash

2,200

–

Trade payables

7,000

7,000

Bank overdraft

–

3,000

Requirements

(a) Calculate the current ratio for each of the two firms.

(b) Discuss the implications of the ratios that you have calculated in terms of a request for credit from both of these entities.