What is the acid-test ratio for a merchant with the following account balances?

(Round your answer to two decimal places.)

Cash $22,000

Short-term investments 41,000

Net current receivables 50,000

Merchandise inventory 93,000

Total current liabilities 275,000

A) 0.75B) 0.41C) 0.60D) 0.81

B) 0.41

Explanation:

acid test ratio formula = (current assets excluding inventory) / current liabilities

current assets excluding inventory = $22,000 (cash) + $41,000 (short term investments) + $50,000 (net current receivables) = $113,000 current liabilities = $275,000

acid test ratio = $113,000 / $275,000 = 0.41

The acid test ratio measures the company's ability to pay its short term debts.

B. 0.41

Explanation:

Given that

Cash $22,000

Short-term investments 41,000

Net current receivables 50,000

Merchandise inventory 93,000

Total current liabilities 275,000

Recall that

Acid test ratio = (cash + short term investments + current receivables) : Total liabilities

ATR = (22000 + 41000 + 50000) : 275000

ATR = 113000 : 275000

= 0.4109

= 0.41

Note that, inventories is not added because Acid test ratio also called quick ratio compares current asset with current liabilities and inventories can be difficult to sell in current terms.