Solid Rock Construction Quick Ratio Calculation Tutorial

What is the quick ratio for Solid Rock Construction based on the given data?

Calculate the quick ratio for Solid Rock Construction based on the current assets, inventory, and current liabilities provided.

Answer:

The quick ratio for Solid Rock Construction is 0.6.

The quick ratio is a financial metric used to assess a company's ability to pay off its short-term liabilities with its most liquid assets. To calculate the quick ratio, you subtract the inventory from current assets and then divide the result by current liabilities.

In the case of Solid Rock Construction, the calculation is as follows:

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

Given that the company has current assets totaling $7 million, with $4 million in inventory, and current liabilities of $5 million, the quick ratio can be calculated as:

Quick Ratio = ($7 million - $4 million) / $5 million

Therefore, the quick ratio for Solid Rock Construction is 0.6. This corresponds to option (A) in the given choices provided in the question.

Understanding the quick ratio is essential for investors and creditors to evaluate a company's liquidity and financial health. A quick ratio of less than 1 suggests that the company may have difficulties meeting its short-term obligations. In the case of Solid Rock Construction, the quick ratio of 0.6 indicates that the company may need to improve its liquidity management to ensure financial stability.