Question

Freiman Corporation's most recent balance sheet and income statement appear below:Balance SheetDecember 31, Year 2 and Year 1(in thousands of dollars)Year 2 Year 1Assets Current assets: Cash $182 $142 Accounts receivable 275 295 Inventory 142 152 Prepaid expenses 51 51 Total current assets 650 640 Plant and equipment, net 810 810 Total assets $1,460 $1,450 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $152 $172 Accrued liabilities 101 101 Notes payable, short term 71 81 Total current liabilities 324 354 Bonds payable 313 323 Total liabilities 637 677 Stockholders’ equity: Common stock, $2 par value 122 122 Additional paid-in capital--common stock 255 255 Retained earnings 446 396 Total stockholders’ equity 823 773 Total liabilities & stockholders’ equity $1,460 $1,450 Income StatementFor the Year Ended December 31, Year 2(in thousands of dollars) Sales (all on account) $1,750 Cost of goods sold 1,000 Gross margin 750 Selling and administrative expense 414 Net operating income 336 Interest expense 57 Net income before taxes 279 Income taxes (30%) 84 Net income $195The acid-test ratio at the end of Year 2 is closest to:1.411.612.041.07

Answer 1

Hence, the acid test ratio at the end of Year 2 is 1.411 times

Thus, the correct option is a. 1.411 times

Step-by-step explanation:

Acid test Ratio : It shows a ratio between current assets excluding stock and prepaid expenses and current liabilities. The use of this ratio is to measure the liquidity of the company for a short period of time.

where,

current assets excluding stock and prepaid expenses is also known as quick assets

In mathematically,

Acid Test Ratio = Quick assets ÷ Current assets

where,

Quick assets = Total Current assets - stock - prepaid expenses

= $650,000 - $142,000 - $51,000

= $457,000

And, the current liabilities for year 2 is $324,000

Now, put the values in the above formula.

So, quick ratio is = $457,000 ÷ $324,000 = 1.411 times

Hence, the acid test ratio at the end of Year 2 is 1.411 times

Thus, the correct option is a. 1.411 times