Final answer:
The current ratio is calculated as 5.5 and the Acid Test Ratio, which excludes inventory, is 3.5, both determined by dividing current assets by current liabilities.
Step-by-step explanation:
Current Ratio and Acid Test Ratio Calculation
To calculate the current ratio, we divide the total current assets by the total current liabilities. Current assets include debtors, cash, and inventory. Current liabilities include trade payables and bank overdraft (OD).
Current Assets = Debtors + Cash and Bank + Inventory
Current Assets = 500,000 + 200,000 + 400,000 = 1,100,000
Current Liabilities = Trade Payables + Bank OD
Current Liabilities = 150,000 + 50,000 = 200,000
So, the Current Ratio = Current Assets / Current Liabilities = 1,100,000 / 200,000 = 5.5
The Acid Test Ratio, also known as the quick ratio, excludes inventory from current assets since it is not as liquid.
Adjusted Current Assets = Current Assets - Inventory
Adjusted Current Assets = 1,100,000 - 400,000 = 700,000
Hence, the Acid Test Ratio = Adjusted Current Assets / Current Liabilities = 700,000 / 200,000 = 3.5