Nabors Company reported the following current assets and liabilities for December 31 for two recent years: Dec. 31, Current YearDec. 31, Previous Year Cash$1,430 $1,710 Temporary investments3,120 3,840 Accounts receivable7,150 2,610 Inventory2,340 2,300 Accounts payable6,500 5,100 Required: a. Compute the quick ratio on December 31 of both years. If required, round your answers to one decimal place. Quick Ratio December 31, current year December 31, previous year b. Is the quick ratio improving or declining?

Quick Ratio for the current year = 3.78

Quick Ratio for the previous year = 1.6

Explanation:

Nabors Company

                               Dec. 31, Current Year         Dec. 31, Previous Year

Cash                                    $1,430                                      $1,710

Temporary investments      3,120                                     3,840

Accounts receivable            7,150                                   2,610

Inventory                              2,340                                  2,300

Accounts payable               6,500                                   5,100

Quick Ratio = Cash + Cash Equivalents + Accounts Receivables/ Accounts Payables

Quick Ratio for the current year = $ 1430+ 3120 + 7150/ 6500

                                                      = 24570/6500=  3.78

Quick Ratio for the previous year = $ 1710+ 3840 + 2610/ 5100

                                                      = 8160/5100=  1.6

A quick ratio less than 1.0 means that the current liabilities exceed the quick assets.  a rule of thumb the quick ratio must have a value greater than 1.0 to conclude that the company is unlikely to face near term liquidity problems. . A value less than 1.0 raises the liquidity concerns unless the a company can generate enough cash from inventory sales or if much of its liabilities are not due until late in the next period.

Similarly a value greater than 1.0 can hide a liquidity problem if payable are due shortly and receivables are not collected late until next period.

It is improving.

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