A family runs a large farm in South Australia.

Here is the quick ratio for the prior year and the current year.

Based on this ratio, evaluate the financial situation of the business.

Prior year Current year
1.1 0.7

Question

A family runs a large farm in South Australia.

Here is the quick ratio for the prior year and the current year.

Based on this ratio, evaluate the financial situation of the business.

Prior year	Current year
1.1	0.7

BlackTom AI · Accepted Answer

The question presents a decline in the quick ratio from the prior year to the current year and asks to evaluate the financial situation.

First, recall what the quick ratio measures: it assesses a firm’s ability to meet short-term obligations using only the most liquid assets (cash, marketable securities, and receivables) relative to current liabilities. A higher ratio indicates better liquidity, while a lower ratio signals tighter liquidity.

In this case, the prior year quick ratio is 1.1, which suggests decent liquidity because assets are more than enough to cover current liabilities. However, in the current year the quick ratio falls to 0.7, a notable drop. This indicates the farm’s liquidity has weakened; the business may struggle to cover immediate obligations without resorting to selling inventory (which is not included in the quick ratio) or securing additional financing.

It’s important to interpret the magnitude: dropping from 1.1 to 0.7 reduces the cushion for meeting short-term debts and could imply higher liquidity risk, potential reliance on operating cash flow, or a need to improve working capital management.

Now, consider potential distractors (even though none are listed here): 
- If an option claimed the situation improved, that would be inconsistent with the observed drop in the quick ratio. 
- An option suggesting liquidity is still strong would be contradicted by a ratio below 1, which often signals insufficient liquid assets to cover current liabilities. 
- An option claiming the ratio is irrelevant to overall financial health would ignore liquidity importance; the quick ratio is a standard liquidity measure, so it is indeed relevant.

Because the current-year quick ratio is 0.7, which is below 1, the most accurate takeaway is that the financial liquidity position has weakened compared with the prior year, signaling increased liquidity risk for the business.

In summary, the change from 1.1 to 0.7 reflects a deterioration in liquidity, making the organization more vulnerable to short-term funding pressures unless corrective actions are taken.

A family runs a large farm in South Australia. Here is the quick ratio for the prior year and the current year. Based on this ratio, evaluate the financial situation of the business. Prior year Current year 1.1 0.7

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