What is the quick ratio (or acid test ratio) for a company that has current assets of $28,000, inventory of $4,000, and current liabilities of $6,000?

To calculate the quick ratio, also known as the acid-test ratio, you need to focus on the most liquid assets available to a company to cover its current liabilities. The quick ratio formula is:

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Given the information:

• Current Assets = $28,000

• Inventory = $4,000

• Current Liabilities = $6,000

First, subtract the inventory from the current assets:

$28,000 - $4,000 = $24,000

Now, use the quick ratio formula:

Quick Ratio = $24,000 / $6,000 = 4

This results in a quick ratio of 4/1, which indicates that for every dollar of current liabilities, the company has four dollars in liquid assets available to cover them. This is a strong indicator of liquidity and financial health, as it shows that the company can easily meet its short-term obligations without needing to rely on selling inventory.

Understanding this ratio is crucial for contractors and businesses alike, as it helps assess the company's ability to maintain operations, pay bills, and manage cash flow effectively without liquidating inventory.