Practice Management - Finances Question

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Azin Soumeeh

February 29, 2020 20:34

Hi, I am currently studying for my exam and unfortunately I am unable to figure this answer. Can someone please explain to me how the current ratio is 1.11?

Cinderella is trying to find her firm's ability to convert assets into cash (liquidity). The firm has $457,900 in the bank account, accounts receivable represent $125,678 and the accounts receivable aging is currently measured at 65 days. Its total liabilities are currently $760,111. Which of the following amounts for the revenue billed but not earned, would be more appropriate, in order for the firm to have a “healthy” liquidity?

The quick ratio is calculated as follows:
(total cash + accounts receivable + revenue billed but not earned) ÷ total liabilities.

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  HaythamNCARB March 01, 2020 05:16

  Hi Azin,

  Current Ratio is different than Quick Ratio. Current ration range from 1.5 - 1.1

  Revenue billed but not earned should contribute to solvency (current ratio), however, since the equation is provided we'll assume it contributes to liquidity (quick ratio).

  With simple math, revenue billed but not earned = 255,544

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  Kirill Ryadchenko June 18, 2020 06:29 (Edited June 18, 2020 06:30)

  HaythamNCARB

  Could you please provide the details of "Simple Math", I cant arrive to the same revenue billed not earned as you've provided.
  
  (457,900+125,678+x)/760,111=1.11

  x=260,145.21

  Where am I wrong?

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  HaythamNCARB June 18, 2020 13:49

  Hi Kirill,

  Yes you;re right. If the objective if healthy liquidity the answer will be any value above 1

  However, I entered 255,544, which is slightly lower than 1.1 because I encountered the same question in WEARE, so not necessary the options can be 1.11.

  Azin,

  Could you please provide the complete question to have a full grasp of the question / answer ?

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