Quick questions on Liquidity ratios: N(A)-Level Principles of Accounts

Both are usually written as a ratio to 1, such as $2\!:\!1$.

The current ratio shows how many dollars of current assets the business has for each dollar of current liabilities. A figure around $2\!:\!1$ is often seen as comfortable, though it varies by business. Too low and the business may struggle to pay bills; very high may mean cash is sitting idle.

The quick ratio is stricter because it removes inventory, the current asset that takes longest to become cash (it must be sold, and credit sales must then be collected). A quick ratio around $1\!:\!1$ suggests the business can meet its debts without relying on selling inventory.

Current assets are \24,000$and current liabilities are$\$12,000$. State the current ratio. [2 marks]

Current assets are \20,000$, of which inventory is$\$8,000$; current liabilities are \10,000$. Find the quick ratio. [2 marks]

Explain why a business with good profits might still have poor liquidity. [2 marks]