Homework SourseWhat is the acid test ratio for Company A calculated using t
What is the acid test ratio for Company A calculated using the following Balance Sheet?
Company A
Balance Sheet
December 31, 2010
Assets
Cash
$29,000
Accounts receivable (net)
114,000
Inventory
113,000
Prepaid expenses
6,000
Long-term investments
18,000
Net property, plant, and equipment
507,000
Total assets
$787,000
Liabilities and equity
Accounts payable
$73,000
Note payable
358,000
Common stock
186,000
Retained earnings
170,000
Total liabilities and equity
$787,000
1.96
1.83
1.42
3.59
| Company A |
| Balance Sheet |
| December 31, 2010 |
Solution
The acid test ratio or the quick ratio is the indicator of whether a firm has sufficient short-term assets to cover its immediate liabilities.
Acid test ratio = Cash +Cash Equivalents + Short term investments + Current receivables
Current Liabilities
= $ 29,000 + $ 114,000
$73,000
=$ 143,000
$73,000
= 1.96
Answer- a) 1.96
Notes-
1. Inventory and prepaid expenses are not included while calculating Acid test ratio.
2. Notes payable will not be included in calculating this ratio assuming the amounts are not due within one year.
