Final answer:
The company's acid test ratio of 1.00 and $5 million in inventory, along with $10 million in current liabilities, indicates that its total current assets are $15 million. The correct answer is C) $15 million.
Step-by-step explanation:
The acid test ratio, also known as the quick ratio, measures a company's ability to cover its current liabilities without relying on the sale of its inventory. It is calculated by subtracting inventory from current assets and then dividing by current liabilities. In this case, the company has an acid test ratio of 1.00 and $5 million in inventory. Knowing that the formula for the acid test ratio (excluding inventory) is:
(Current Assets - Inventory) / Current Liabilities = Acid Test Ratio
Substituting the known values:
(Current Assets - $5 million) / $10 million = 1
This can be rearranged to:
Current Assets - $5 million = $10 million
Therefore, the company's total current assets are:
Current Assets = $10 million + $5 million
Current Assets = $15 million.
The correct answer is C) $15 million. Therefore, the company has total current assets of $15 million to cover the $10 million in current liabilities.