Question

The following information on current assets and current liabilities is for Belkin Company. Cash $ 1,350 Prepaid expenses $ 700 Accounts receivable 2,811 Accounts payable 5,000 Inventory 6,400 Other current liabilities 700 a. Compute Belkin's acid-test ratio. b. If its competitor, Logit, has an acid-test ratio of 1.2, which company is better able to pay for current liabilities with its quick assets

Answer 1

Belkin's acid-test ratio is 0.73

Let understand that the Acid-Test ratio is also called the quick ratio. It is basically a liquidity ratio that shows how much an organization is able to convert its assets into cash.

• The formulae for Quick Ratio is Quick Assets / Current liability

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

Quick Assets = $1,350 + $0 + $2,811

Quick Assets = $4,161

Current liabilities = Accounts payable + Other current liabilities

Current liabilities = $5,000 + $700

Current liabilities = $5,700

Acid-Test ratio = $4,161 / $5,700

Acid-Test ratio = 0.73

In conclusion, when a company has an Acid-Test ratio of less than 1, its means it will be unable to pay its immediate liability in near future.

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