Final answer:
The current ratio is 5.5, and the Acid Test Ratio is 3.5, calculated by using the student-provided financial information and appropriate formulas.
Step-by-step explanation:
The student has asked to calculate the current ratio and Acid Test Ratio (also known as quick ratio) using the provided financial information. To calculate the current ratio, we add up the current assets (Debtors + Cash and Bank + Inventory) and divide them by the current liabilities (Trade Payables + Bank OD). The formula for the Acid Test Ratio is similar, but inventory is not included in current assets since it is not as quickly convertible to cash.
The student's information:
- Debtors: $500,000
- Cash and Bank: $200,000
- Inventory: $400,000
- Trade Payables: $150,000
- Bank OD: $50,000
The current ratio would be calculated as follows: ($500,000 + $200,000 + $400,000) / ($150,000 + $50,000) = $1,100,000 / $200,000 = 5.5.
The Acid Test Ratio would be calculated by excluding Inventory: ($500,000 + $200,000) / ($150,000 + $50,000) = $700,000 / $200,000 = 3.5.
To calculate the Acid Test Ratio, subtract the Inventory from the current assets and then divide by the current liabilities. In this case, the current assets (excluding Inventory) are Debtors and Cash and Bank, which total to 700,000. The current liabilities are the Trade Payables and Bank OD, which total to 200,000. So, the Acid Test Ratio is 700,000/200,000 = 3.5.