Keswick Industries has the following current assets and current liabilities on the company's balance sheet: Cash $17,000; Accounts Receivable $8,200; Inventory $54,000; Prepaid Rent $3,000; Accounts Payable $23,000; Long-Term Notes Payable $20,000; and Unearned Revenue $5,500. The company's acid-test ratio would be
A) 1.12:1
B) 0.38:1
C) 0.88:1
D) 1.07:1

Question

Quizplus · Accepted Answer

The acid-test or quick ratio is a measure of a company's ability to meet its short-term obligations using only its most liquid assets. It's calculated as follows:

Acid-test ratio = (Cash + Accounts Receivable + Marketable Securities) / Current Liabilities

In this case, Keswick Industries' most liquid assets are the cash and accounts receivable, which total $17,000 + $8,200 = $25,200. The current liabilities are the accounts payable and unearned revenue, which total $23,000 + $5,500 = $28,500.

Acid-test ratio = $25,200 / $28,500 ≈ 0.88:1

Therefore, the best choice is C) 0.88:1.

Keswick Industries Has the Following Current Assets and Current Liabilities