Question

Refer to the following selected financial information from McCormik, LLC. Compute the company's acid-test ratio for Year 2. Year 2 Year 1 Cash $ 37,500 $ 36,850 Short-term investments 90,000 90,000 Accounts receivable, net 85,500 86,250 Merchandise inventory 121,000 117,000 Prepaid expenses 12,100 13,500 Plant assets 388,000 392,000 Accounts payable 113,400 111,750 Net sales 711,000 706,000 Cost of goods sold 390,000 385,500

Answer 1

Answer:

The company's acid-test ratio for Year 2 is 1.88 times.

Explanation:

Quick asset ratio :

The quick asset ratio is that ratio which shows a relationship between current assets and current liabilities. But it does not include stock. This ratio is used to check the liquidity of the company.

The formula to compute quick asset ratio is computed below:

=  Quick assets ÷ current liabilities

where quick assets includes all current assets except stock.

And, the quick assets value is comprises of cash, short term investment and account receivable.

So, the quick asset value = Cash + short term investment + Account receivable

= $37,500 + $90,000 + $85,500

= $213,000

After computing the quick assets, now we can compute the quick asset ratio by using an formula.

=   Quick assets ÷ current liabilities

= $213,000 ÷ $113,400

= 1.88 times

Hence, the company's acid-test ratio for Year 2 is 1.88 times.