Interpretation of Financial Statements

AAfrina11y ago

Hi Sir, Can u please explain to me why the following calculation suits this particular question? What is the acid test ratio of Edward Co. given the information below: EDWARD CO. TRIAL BALANCE ( EXTRACT ): Receivables $ 176000 Inventories $ 20000 Trade Payables $ 61000 Bank Overdraft $ 79000 Long term liability $ 10000 Retained earnings $ 5000. A. 1.13:1 B. 1.40:1 C. 1.35:1 D. 1.26:1 The BPP exam kit gave answer D. But as per required acid test ratio, we know that the calculation is Current asset - Inventories/Current Liabilities : 1. And when i calculated it using this formula, i got the answer 0.97:1 [(176000-20000) - 20000 / ( 61000 + 79000)], which is not included in the options above. The book however gave calculation of Current Ratio & calculation used where as follows: 176000 / (61000+79000) resulting to answer 1.26:1. I wish to know y this calculation was used. Kindly help me.

John MoffatTutor11y ago#1

BPP's answer is correct. The current assets are receivables + inventories = 176,000 + 20,000 = 196,000 The current assets less inventories = 196,000 - 20,000 = 176,000. (or, more obviously, if we remove inventories we are left with just the receivables of 176,000)

AAfrina11y ago#2

oh! Ok thx a lot, now i get it. :) :) :)

John MoffatTutor11y ago#3

You are welcome :-)

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