Task

To calculate and analyze the current and quick (acid-test) ratios of different businesses.

Potz and Pans, a small gift shop, has current assets of $45,000 (including inventory valued at $30,000) and $9,000 in current liabilities. WannaBees, a specialty clothing store, has current assets of $150,000 (including inventory valued at $125,000) and $85,000 in current liabilities.

Both businesses have applied for loans. Click the See all calculators link at bankrate.com and then click on Small Business to answer the following questions:

1. Calculate the current ratio for each company. Which company is more likely to get the loan? Why?

2. The acid-test (or quick) ratio subtracts the value of the firms inventory from its total current assets. Because inventory is often difficult to sell, this ratio is considered an even more reliable measure of a businesss ability to repay loans than the current ratio. Calculate the quick ratio for each business and decide whether you would give either the loan. Why or why not?