Certified Valuation Analyst (CVA) Practice Exam

What is the quick ratio indicated in the financial statements?

1. 0.5

2. 0.9

3. 1.2

4. 1.5

The correct answer is: 0.9

The quick ratio, also known as the acid-test ratio, is a financial metric used to assess a company's ability to meet its short-term obligations with its most liquid assets. It is calculated by taking the company's current assets excluding inventory and dividing that figure by its current liabilities. A quick ratio of 0.9 indicates that for every dollar of current liabilities, the company has 90 cents in liquid assets to cover those liabilities. This suggests that while the company may not possess a dollar for dollar coverage, it is close enough to being able to pay off its short-term debts without having to liquidate inventory. A quick ratio below 1 may indicate potential liquidity issues, but being at 0.9 shows the company is relatively stable, albeit precariously, in its ability to cover immediate financial obligations. The other values suggest varying degrees of financial health, with a higher ratio indicating better liquidity. A ratio of 1.2 or 1.5 would show a stronger ability to cover liabilities, while a ratio of 0.5 implies significant liquidity risk. Therefore, the 0.9 figure reflects a reasonable standing with respect to liquidity management for the company in question.