Question

12. An acid-test or quick ratio of 1.0 is considered less risky than a ratio of 0.50. TRUE FALSE

13. Amber’s Clothing Store reported the following at June 30, 2018: Cash $ 79,000 Accounts Receivable, net: June 30, 2018 June 30, 2017 45,000 53,000 Accounts Payable 55,000 Cost of Goods Sold 288,250 Merchandise Inventory June 30, 2018 June 30, 2017 70,000 90,000 Net Credit Sales Revenue 480,000 Long-Term Assets 220,000 Long-Term Liabilities 140,000 Other Current Assets 150,000 Other Current Liabilities 130,000 Short-term Investments 40,000 Compute Amber’s acid-test ratio for 2018. Show your computations. (Round to 2 decimals.)

Answer 1

• Question 12

>The given statement is TRUE.

>A 1.0 Acid Test ratio is less risky than 0.5 ratio.

>This is because the ratio tells how much Quick Asset is available as compared to Current Liabilities.

>The higher the ratio, the better and less risky it is.

>The ratio of 1.0 states that Quick Assets are equal to Current Liabilities, while the ratio 0.50 states that Quick Assets are half the amount of Current Liabilities.

• Question 13

>Quick Assets = Current Assets – Inventory ending balance – Prepaid expenses.

>Quick Asset = Cash + Accounts receivables net + Other Current Assets + Short term Investments = 79000 + 45000 + 150000 + 40000 = $ 314,000

>Current Liabilities = Accounts payable + Other current Liabilities = 55000 + 130000 = $ 185,000

>Acid Test (or Quick) ratio = Quick Asset / Current Liabilities = 314000 / 185000 = 1.70