Multiple Choice
Which of the following quick (acid test) ratios is generally considered the most desirable for a company, indicating sufficient liquidity without excessive idle assets?
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14. Financial Statement Analysis
Ratios: Quick (Acid Test) Ratio
Multiple Choice
Given the following information for XYZ Company, calculate the acid-test (quick) ratio:- Cash: \$15,000- Accounts Receivable: \$10,000- Inventory: \$20,000- Prepaid Expenses: \$5,000- Current Liabilities: \$20,000What is the acid-test ratio?A) 1.25B) 0.75C) 2.50D) 0.50
A
A) 1.25
B
D) 0.50
C
B) 0.75
D
C) 2.50
Verified step by step guidance1
Step 1: Understand the acid-test (quick) ratio formula. The formula is: Acid-Test Ratio = (Cash + Accounts Receivable) / Current Liabilities. This ratio measures a company's ability to pay its current liabilities using its most liquid assets, excluding inventory and prepaid expenses.
Step 2: Identify the liquid assets from the given information. Liquid assets include Cash (\$15,000) and Accounts Receivable (\$10,000). Inventory and Prepaid Expenses are excluded because they are not considered liquid assets.
Step 3: Add the liquid assets together. Using the formula, sum up Cash and Accounts Receivable: \$15,000 + \$10,000.
Step 4: Identify the Current Liabilities from the given information. Current Liabilities are provided as \$20,000.
Step 5: Divide the total liquid assets by the Current Liabilities to calculate the acid-test ratio. Use the formula: Acid-Test Ratio = (Cash + Accounts Receivable) / Current Liabilities = (\$15,000 + \$10,000) / \$20,000.
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