Question

What is the acid-test ratio for a merchant with the following account balances?

(Round your answer to two decimal places.)
Cash $22,000
Short-term investments 41,000
Net current receivables 50,000
Merchandise inventory 93,000
Total current liabilities 275,000
A) 0.75B) 0.41C) 0.60D) 0.81

Answer 1

B) 0.41

Step-by-step explanation:

acid test ratio formula = (current assets excluding inventory) / current liabilities

• current assets excluding inventory = $22,000 (cash) + $41,000 (short term investments) + $50,000 (net current receivables) = $113,000
• current liabilities = $275,000

acid test ratio = $113,000 / $275,000 = 0.41

The acid test ratio measures the company's ability to pay its short term debts.

Answer 2

B. 0.41

Step-by-step explanation:

Given that

Cash $22,000

Short-term investments 41,000

Net current receivables 50,000

Merchandise inventory 93,000

Total current liabilities 275,000

Recall that

Acid test ratio = (cash + short term investments + current receivables ) ÷ Total liabilities

ATR = (22000 + 41000 + 50000 ) ÷ 275000

ATR = 113000 ÷ 275000

= 0.4109

= 0.41

Note that, inventories is not added because Acid test ratio also called quick ratio compares current asset with current liabilities and inventories can be difficult to sell in current terms.