Current assets for Bush Corporation are $260,000.00 and total assets are $600,000.00. Current liabilities are $170,000.00 and total liabilities are $300,000.00. Included in the current assets are merchandise inventory and prepaid expenses of $25,000.00 and $15,000.00, respectively. What is the acid-test ratio? A. 1.56 B. 0.87

Question

Business

Fabian Meyers

21 December, 21:40

Current assets for Bush Corporation are $260,000.00 and total assets are $600,000.00. Current liabilities are $170,000.00 and total liabilities are $300,000.00. Included in the current assets are merchandise inventory and prepaid expenses of $25,000.00 and $15,000.00, respectively. What is the acid-test ratio? A. 1.56 B. 0.87

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Answers (1)

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Steve Walsh · Answer 1

The acid test ratio is 1.38

Explanation:

The acid test ratio gives an indication of how easy it is for the company to pay back its short term obligations without considering inventory.

Acid test ratio=current assets-merchandise inventory/current liabilities

current assets is $260,000

current liabilities is $170,000

merchandise inventory is $25,000

acid test ratio = ($260,000-$25,000) / $170,000 = 1.38

The acid test ratio is 1.38 which is not of the options given

The only that is not as liquid as other current assets is merchandise inventory, hence deducted from current assets.