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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. 1.26:1The 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.
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)
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