Comprehensive and Detailed 150 to 250 words of Explanation From Retail Securities/Course Guide/topics]:
The quick ratio evaluates whether the company can meet current liabilities using its more liquid current assets. Inventory and prepaid expenses are normally excluded because inventory may require time to sell and prepaid expenses generally cannot be converted into cash to settle liabilities.
Quick assets are calculated as:
$1,200,000 − $300,000 − $100,000 = $800,000
The quick ratio is:
$800,000 ÷ $500,000 = 1.60
Option C is correct.
The result indicates that the company has $1.60 of relatively liquid current assets for every $1.00 of current liabilities. This generally indicates stronger immediate liquidity than a ratio below 1.00, but the result must still be interpreted in context. Receivables included in quick assets may be slow or uncollectible, and industry operating models can produce materially different normal liquidity levels.
Option D is the current ratio obtained by dividing all current assets by current liabilities: $1,200,000 ÷ $500,000 = 2.40. That calculation incorrectly includes inventory and prepaid expenses for purposes of the quick ratio. CIRO’s Retail Securities syllabus expressly includes the current, quick and cash ratios within financial-statement analysis and requires candidates to calculate and interpret liquidity measures.
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