Chapter 6
The Accounting Cycle: Statements and Closing Entries
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The
quick ratio
is similar to the current ratio, but only counts assets that can easily be turned
into cash. Thus, assets such as prepaid items are omitted and only cash, accounts receivable and
short-term investments are included. Short-term investments will not be covered in this textbook.
The formula is shown below
=
Cash + Short-Term Investments + Accounts Receivable
Quick Ratio
Current Liabilities
From the balance sheet in Figure 6.24, the quick ratio is calculated as
Quick Ratio = $3,800 + $4,000
$4,075
= 1.91
This shows that the company has $1.91 of very liquid current assets for every $1.00 of current
liabilities. Again, MP Consulting is doing well. If the quick ratio were to drop below 1.00, it could
indicate problems with paying back debts.
The Evolution fromManual to Computerized Accounting
One of the challenges in teaching a modern accounting course is the need to combine traditional
concepts and methods with modern technology. However, the reality is that today’s accounting
students may never see or use a set of paper-based accounting journals and ledgers.
Although computerized systems are becoming more common, and while they make gathering and
analyzing information easier for the accountant, having a sound knowledge of traditional paper-
based systems provides a foundation for understanding what accounting is all about. It also allows
for an understanding of how the computerized system will store the information and how to look
for errors or anomalies in the data.
Before computers,bookkeepers used various types of journals tomaintain company financial records.
Special journals were used to track similar types of transactions, such as sales and purchases. The
general journal was used for infrequent transactions, such as adjustments. All these journals were
used to update the general ledger and other accounts.
In manual systems, recording procedures often provide the analytical structure for the accountant.
If accounts receivable needed analyzing, the accountant would refer to all related journals and
ledgers for accounts receivable. If, on the other hand, inventory was being analyzed, the paper trail
from receipt to shipping would be tracked accordingly.
