At year end, Smith Corporation has Cash of $12,000, current Accounts Receivable of $24,000, Merchandise Inventory of $3,000, and Prepaid Expenses totaling $5,000. Liabilities of $20,000 must be paid next year.

What is the acid-test ratio?

Financial Statements depicts the financial position of a firm at a particular point of time or specified date. The users of financial statements use various types of analysis to understand or compare the current financial statements of the company to prior years or with those of the competitors.

‘Ratio Analysis’ is used to analyze the performance of a company. It is used to analyze the liquidity, profitability, solvency and operational efficiency of the company.

Given:

Cash = $12,000

Accounts receivable = $24,000

Current liabilities = $20,000

Acid test ratio is also known as quick ratio. It is the ratio of quick assets to current liabilities.

Quick assets = Cash + Accounts receivable

Quick assets = $12,000 + $24,000

Quick assets = $36,000

Now, acid test ratio or quick ratio can be calculated as:

Quick ratio = [tex]\frac{Quick assets}{Current liabilities}[/tex]

Quick ratio = [tex]\frac{36,000}{20,000}[/tex]

Quick ratio = 1.8

At year end, Smith Corporation has Cash of $12,000, current Accounts Receivable of $24,000, Merchandise Inventory of $3,000, and Prepaid Expenses totaling $5,000. Liabilities of $20,000 must be paid next year. What is the acid-test ratio?

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At year end, Smith Corporation has Cash of $12,000, current Accounts Receivable of $24,000, Merchandise Inventory of $3,000, and Prepaid Expenses totaling $5,000. Liabilities of $20,000 must be paid next year.

What is the acid-test ratio?