Question

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

Answer 1

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.