Chapter 3, Problem 5CPA

To determine

Current ratio:

Current ratio is a liquidity ratio, which expresses the relationship between current assets and current liabilities. Current ratio displays the short term liquidity position of a company. It depicts how the company’s current assets are used to pay current liabilities. Current ratio can be calculated by the following formula:

$\text{Current ratio = }\frac{\text{Current assets}}{\text{Current}\text{liabilities}}$

Quick ratio:

Quick ratio is a liquidity ratio, which displays how current liabilities are paid by the current assets excluding prepaid expenses and inventories. It ratio is used to measure the company’s immediate short term liquidity. Quick ratio can be calculated by using the following formula:

$\text{Quick ratio = }\frac{\left(\text{Cash + Marketable Securities + Accounts receivable}\right)}{\text{Current}\text{liabilities}}$

To identify: The correct answer by finding the effect of cash payment on current ratio and quick ratio