Question

ritchett Co. reported the following year-end data: Cash $ 15,000 Short-term investments $ 5,000 Accounts receivable (current) $ 8,000 Inventory $ 20,000 Other current assets $ 6,000 Total current liabilities $ 20,000 Compute the (a) current ratio and (b) acid-test ratio.

Answer 1

Answer:

a.

The current ratio is 2.7

b.

The acid-test ratio is 1.7

Explanation:

a)

The current ratio is a ratio to measure the liquidity of a firm. The current ratio calculates the amount of current assets per every $1 of current liability.

Current ratio = Current assets / Current Liabilities

Current ratio = (15000 + 5000 + 8000 + 20000 + 6000) / 20000

Current ratio = 2.7 or 2.7 : 1

b)

The acid test ratio is also a measure of liquidity that only takes into account the most liquid asset in calculation of the ratio and it excludes the inventory in the calculation.

Acid test ratio = (Current assets - Inventory) / Current liabilities

Acid test ratio = (15000 + 5000 + 8000 + 6000) / 20000

Acid test ratio = 1.7 or 1.7 : 1