Asked by Paige Gratton on Apr 26, 2024
Verified
If a company has an acid test ratio of 1.00,$5 million in inventory,and $10 million in current liabilities,what are its total current assets?
A) $5 million
B) $10 million
C) $15 million
D) $20 million
Acid Test Ratio
A financial metric that assesses a company's ability to pay off its short-term liabilities with its quick assets (cash, marketable securities, and receivables).
Current Assets
Assets that are expected to be converted into cash within one fiscal year or one operating cycle, whichever is longer.
Current Liabilities
Short-term financial obligations that are due within one year or within the normal operating cycle of a business.
- Appreciate the importance of liquidity ratios in the assessment of a business's short-term financial stability.
Verified Answer
RO
Raven OakesApr 29, 2024
Final Answer :
C
Explanation :
The acid test ratio is calculated as (Cash + Marketable Securities + Receivables) / Current Liabilities. Given an acid test ratio of 1.00, this means that the company's quick assets (Cash + Marketable Securities + Receivables) equal its current liabilities ($10 million). Since inventory is not included in the acid test ratio and the company has $5 million in inventory, the total current assets would be the sum of quick assets ($10 million) and inventory ($5 million), totaling $15 million.
Learning Objectives
- Appreciate the importance of liquidity ratios in the assessment of a business's short-term financial stability.