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Quick Ratio Analysis Benchmark Example

Quick Ratio Analysis Benchmark Example

Quick ratio calculation is a useful skill for any business that may face cash flow issues. Furthermore, quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. It normally includes cash, marketable securities, and some accounts receivables.

Current liabilities represent financial obligations that come due within one year. It normally included accounts payable, notes payable, short-term loans, current portion of term debt, accrued expenses and taxes.

For example, a business has $5,000 in current assets, $1,000 in inventories and $2,500 in current liabilities.

Quick ratio = (5,000 – 1,000) / 2,500 = 1.6

Since we subtracted current inventory, it means that for every dollar of current liabilities there are $1.6 of easily convertible assets.

Quick Ratio Example

The following is a quick ratio analysis benchmark example. Suzy has started a boutique-style bakery which is mainly servicing customers who desire wedding cakes. Suzy, who works in a trade which she is truly passionate about, is by no means an expert in financial statements. She is, however, an expert in the operations of her business. She knows that if she wants to scale, something that her customers are driving her to as much as her own desires for financial success, she needs a partner who can provide the business expertise. About the time she realizes this Suzy meets Monica, an experienced restauranteur. The two women quickly develop a rapport. Suzy learns that Monica is looking for a new deal and communicates her needs over lunch. They resolve, after a testing period, to support each other by applying their expertise to Suzy’s business. The two women become partners.

Calculation

Monica knows that lack of cash is one of the main reasons that causes any business, especially in food-service, to close doors. As Monica takes her initial look at the financial statements of the business she keeps this in mind.

Monica wants to know if the company can pay its debts. Due to the fact that the business desperately needs all inventory to continue scaling, she resolves to use quick ratio vs current ratio calculation. Since there is no quick ratio accounting calculator, she performs this calculation:

If:

Current Assets = $5,000 Inventory = $1,000 Current Liabilities = $2,500

Quick ratio = (5,000 – 1,000) / 2,500 = 1.6

This means that for every dollar of current liabilities there are $1.6 of easily convertible assets.

This is a major relief to Monica. Finishing her analysis of the company statements Monica feels very confident. As long as employee turnover remains the same the two women have avoided two of the most important issues a business could face.

quick ratio analysis benchmark example

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quick ratio analysis benchmark example

See Also:

Quick Ratio Analysis

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Notes Payable

See Also:
Current Liabilities
Net 30 Credit Terms
Accounts Payable
Notes Receivable
Long Term Debt
Financial Ratios

Notes Payable Definition

Notes payable is a written promise to pay a certain amount at some future date. The account appears on the balance sheet when the company borrows money and signs a note or contract stating they will repay the amount plus interest.

Notes Payable Meaning

A note payable is created when a company borrows money usually from a bank or financial institution, but some other companies perform their own financing if they are large enough. Accounting treatment for this account depends on whether the note signed is longer than a year i.e. long term debt or short term. Companies sign these notes when they are in need of growth and do not have the cash on hand. Some companies might also perform this function in the short term so certain Financial Ratios are in balance or are ok with other debt covenants that it may have. As a company grows it expects that its future cash flow will be more than substantial to account for the note principal as well as the interest.

Notes Payable Example

Tim wants to start his business and as he does so he begins to look for financing. He goes to the bank and signs a note for $10,000 with an interest rate of 6%. The note is due in exactly one year which Tim believes will be enough time to get his business off the ground. At the end of the year Tim will owe the bank $10,600. This is the principal amount of $10,000 plus the 6% interest over the year which equals $600.

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 Notes Payable

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Notes Payable

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Current Liabilities

See Also:
Balance Sheet
Current Assets
Fixed Assets
Fixed Assets – NonCurrent Assets

Current Liabilities

Current liabilities is a category of liabilities on the balance sheet. The category also consists of debts and other financial obligations expected to be paid or settled within one year or within one normal operating cycle of the business (whichever is longer). The balance sheet also includes a category for long-term liabilities. In this article, we will look at examples of items that would be found in this category and the key ratios to calculate current liabilities.

Examples of Items

Examples of items considered this type of liability include the following:

Key Ratios to Calculate Current Liabilities

You need to have the following key ratios to calculate current liabilities:

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current liabilities, Key Ratios to Calculate Current Liabilities

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current liabilities, Key Ratios to Calculate Current Liabilities

 

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