Question

At year-end, Schultz Inc. has cash of $11,600, current accounts receivable of $48,900, merchandise inventory of $37,900, and prepaid expenses totaling $5,100. Liabilities of $55,900 must be paid next year. What is Schultz's acid-test ratio?

A: 1.08
B: 0.21
C: 1.76
D: Cannot be determined from data given

Answer 1

The acid-test ratio of Schultz Inc. is 1.08, indicating its ability to meet short-term obligations using its most liquid assets.

Step-by-step explanation:

The acid-test ratio, also known as the quick ratio, is a measure of a company's ability to meet its short-term obligations using its most liquid assets. It is calculated by subtracting the inventory and prepaid expenses from the current assets and dividing the result by the current liabilities. In this case, the current assets include cash (11,600) and current accounts receivable (48,900), but exclude merchandise inventory (37,900) and prepaid expenses (5,100). So, the quick assets would be 11,600 + 48,900 = 60,500. The current liabilities are 55,900. Dividing the quick assets by the current liabilities gives us an acid-test ratio of 1.08. Therefore, the correct answer is A: 1.08.