Question

Q1. ALPHA Company reported the following year-end information: Cash $ 52,000 Short-term investments 12,000 Accounts receivable...

Q1. ALPHA Company reported the following year-end information:

Cash

$ 52,000

Short-term investments

12,000

Accounts receivable

54,000

Inventory

325,000

Prepaid expenses

17,500

Accounts payable

106,500

Other current payables

25,000


Instructions:
1- Explain the purpose of the acid-test ratio.
2- Calculate the acid-test ratio for ALPHA Company.

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Homework Answers

Answer #1

1- Explain the purpose of the acid-test ratio.

The acid test ratio indicate the liquidity of a company by measuring its ability to pay off its current liabilities with quick assets.

formula

Acid-Test Ratio = Quick Assets/Current Liabilities

2- Calculate the acid-test ratio for ALPHA Company.

Quick Assets=Cash+Accounts receivable+Short-term investments

=52000+54000+12000=118000

Current Liabilities=106,500+25,000=131500

Acid-Test Ratio = $118,000/$131,500 = 0.90

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