Question

Cash - $ 1,340 Prepaid expenses - $ 600 Accounts receivable - 2,023 Accounts payable - 5,100 Inventory - 4,300 Other current liabilities - 600 Use the above information on current assets and current liabilities to compute the acid-test ratio.

Answer 1

Answer:

The correct answer is 0.59 : 1.

Explanation:

According to the scenario, the given data are as follows:

Cash = $1,340

Prepaid expenses = $600

Accounts receivable = $2,023

Accounts payable = $5,100

Inventory = $4,300

Other current liabilities = $600

So, we can calculate Quick ratio by using following formula:

Acid Test Ratio = Quick Assets / Current Liabilities

Where, Quick Assets = Cash and cash equivalents + Marketable securities + Accounts receivable

=  $1,340 + $2,023

= $3,363

And Current liabilities = Accounts payable + Other current liabilities

=  $5,100 + $600

= $ 5,700

So, by putting the value in the formula, we get,

Acid Test Ratio = $3,363 / $5,700

= 0.59

Hence, the acid test ratio is 0.59 : 1