To calculate and analyze the current and quick (acid-test) ratios of different businesses.

EXERCISE

Potz and Pans, a small gift shop, has current assets of \$45,000 (including inventory valued at \$30,000) and \$9,000 in current liabilities. WannaBees, a specialty clothing store, has current assets of \$150,000 (including inventory valued at \$125,000) and \$85,000 in current liabilities. Both businesses have applied for loans.

Instructions: Go to bankrate.com. In search bar at top right, type in see all calculators for small businesses. Answer the following questions:

The assignment will be a minimum of 1 ½ – 2 pages; 12 point font; double spaced. Use business professional writing, construct effective paragraphs, use proper grammar, punctuation, and spelling. This should be a thorough analysis of current and quick ratios. TYPE QUESTIONS FOLLOWED BY ANSWERS.

Calculate the current ratio for each company. Which company is more likely to get the loan? Analyze/discuss your answer stating why you choose the company.
The acid-test (or quick) ratio subtracts the value of the firm’s inventory from its total current assets. Because inventory is often difficult to sell, this ratio is considered an even more reliable measure of a business’s ability to repay loans than the current ratio. Calculate the quick ratio for each business and decide whether you would give either the loan. Based on you analysis for both ratios, analyze/discuss which company you would give the bank loan to.

Sample Solution