Question

Information from Gre Company's balance sheet follows

Current Assets
Cash	$2,100,000
Marketable Securities	7,200,000
Accounts Receivable	50,500,000
Inventories	65,000,000
Prepaid expenses	1,000,000
Total current assets	$125,800,000
Current Liabilities
Notes payable	$1,400,000
Accounts payable	18,000,000
Accrued expenses	11,000,000
Income taxes payable	600,000
Current portion of long-term debt	3,000,000
Total current liabilities	$34,000,000

What is the acid-test ratio for Greg Company?

Select one:

a. 1.60

b. 1.76

c. 2.20

d. 1.90

What is the effect of the collection of accounts receivable on the current ratio and net working capital, respectively?

Select one:

a. current ratio- no effect; working capital- no effect

b. current ratio- increase; working capital- increase

c. current ratio- increase; working capital- no effect

Answer 1

Question 1 :

The correct answer is "B" : 1.76

Reason : Acid-test ratio = (Cash & Cash equivalents+Accounts Receivable+Marketable Securities)/Current liabilities

Acid-test Ratio = (21,00,000+505,00,000+72,00,000)/340,00,000 = 1.76

Question 2 :

The correct answer is "A" : Current Ratio - no effect; working capital - no effect

Reason : This is because collection of accounts receivable will have following 2 impacts : i) Increase in Cash & ii) Decrease in Accounts Receivable.

Hence the net impact would be that the current assets will remain unchanged as cash will increase by the same amount with which accounts receivable would decrease and hence there will be no impact on current ratio or working capital.