What is the acid-test ratio for a merchant with the following account balances?

(Round your answer to two decimal places.)

Cash $22,000

Short-term investments 41,000

Net current receivables 50,000

Merchandise inventory 93,000

Total current liabilities 275,000

A) 0.75B) 0.41C) 0.60D) 0.81

B. 0.41

Explanation:

Given that

Cash $22,000

Short-term investments 41,000

Net current receivables 50,000

Merchandise inventory 93,000

Total current liabilities 275,000

Recall that

Acid test ratio = (cash + short term investments + current receivables) : Total liabilities

ATR = (22000 + 41000 + 50000) : 275000

ATR = 113000 : 275000

= 0.4109

= 0.41

Note that, inventories is not added because Acid test ratio also called quick ratio compares current asset with current liabilities and inventories can be difficult to sell in current terms.

B) 0.41

Explanation:

acid test ratio formula = (current assets excluding inventory) / current liabilities

current assets excluding inventory = $22,000 (cash) + $41,000 (short term investments) + $50,000 (net current receivables) = $113,000 current liabilities = $275,000

acid test ratio = $113,000 / $275,000 = 0.41

The acid test ratio measures the company's ability to pay its short term debts.