Question

The financial records of Alpha Ltd. show a Current Ratio of \( 2.5:1 \) and a Quick Ratio of \( 1.5:1 \). If the total Current Liabilities of the company equal \(\$40,000\), what is the total dollar valuation of the Inventory held by the firm?

• A. \$40,000
• B. \$60,000
• C. \$100,000
• D. \$20,000

Hint:

You can solve this faster by looking at the ratio differences directly. The difference between the current ratio (2.5) and quick ratio (1.5) is exactly 1.0. Multiplying this index difference directly by current liabilities gives the answer immediately: \( 1.0 \times \$40,000 = \$40,000 \).

Answer 1

The Correct Option is A

Concept: The Current Ratio measures a firm's total short-term liquidity, while the Quick Ratio excludes less liquid items like inventory and prepaid expenses. The difference between current assets and quick assets helps isolate the value of inventory: \[ \text{Current Assets} - \text{Quick Assets} = \text{Inventory} \]

Step 1: Calculate the total absolute value of Current Assets.
Given that the Current Ratio is \( \frac{\text{Current Assets}}{\text{Current Liabilities}} = 2.5 \), we substitute current liabilities (\$40,000): MATH_ccfcf82727a34cf7ab754fc455cabfc6 \vspace{0.5cm} Step 2: {\color{red}Calculate the total absolute value of Quick Assets.}
Given that the Quick Ratio is MATH_dd19775c5d544bada35a9a5a8dbb8eee, substitute current liabilities (\$40,000): \[ \text{Quick Assets} = 1.5 \times \$40,000 = \$60,000 \]

Step 3: Isolate the value of inventory by subtraction.
Subtract the quick assets from the total current assets: \[ \text{Inventory} = \text{Current Assets} - \text{Quick Assets} \] \[ \text{Inventory} = \$100,000 - \$60,000 = \$40,000 \]