Question

Computing and analyzing acid-test and current ratios LO A1

Case X Case Y Case Z
Cash $ 2,000 $ 110 $ 1,000
Short-term investments 50 0 580
Current receivables 350 470 700
Inventory 2,600 2,420 4,230
Prepaid expenses 200 500 900
Total current assets $ 5,200 $ 3,500 $ 7,410
Current liabilities $ 2,000 $ 1,000 $ 3,800
Compute the current ratio and acid-test ratio for each of the above separate cases.
Current Ratio
Choose Numerator: Choose Denominaa Current Ratio
/ = Current ratio
Case X / = to 1
Case Y / = to 1
Case Z / = to 1
Acid-Test Ratio
Choose Numerator: Choose Denominator: Choose cid-Test Ratio
/ = Acid-test ratio
Case X / = to 1
Case Y / = to 1
Case Z / = to 1

Answer 1

Current ratio

Case X 2.60

Case Y 3.50

Case Z 1.95

Acid -test ratio

Case X 1.20

Case Y 0.58

Case Z 0.60

Step-by-step explanation:

Computation of the current ratio and acid-test ratio

CURRENT RATIO

Particulars Choose Numerator / Choose denominator = Current Ratio

Formula Current Assets / Current Liabilities = Current Ratio

Case X $5,200.00 / $2,000.00 = 2.60 to 1

Case Y $3,500.00 / $1,000.00 = 3.50 to 1

Case Z $7,410.00 / $3,800.00 = 1.95 to 1

ACID - TEST RATIO

Particulars Choose Numerator / Choose denominator = Acid Test Ratio

Formula Quick Assets / Current Liabilities = Acid Test Ratio

Case X $2,400.00 / $2,000.00 = 1.20 to 1

Case Y $580.00 / $1,000.00 = 0.58 to 1

Case Z $2,280.00 / $3,800.00 = 0.60 to 1

Note:

Quick Asset

Case X

Cash $ 2,000

Short-term investments 50

Current receivables 350

=$2,400

Case Y

Cash $ 110 $

Short-term investments 0

Current receivables 470

=$580

Case Z

Cash $ 1,000

Short-term investments 580

Current receivables 700

=$2,280

Therefore:

Current ratio will be:

Case X 2.60

Case Y 3.50

Case Z 1.95

Acid -test ratio will be:

Case X 1.20

Case Y 0.58

Case Z 0.60