Cramer Cooling Company reported the following results for the year just ended: $$\begin{array} { l r }
\text { Cash } & \$ 50,000 \
\text { Accounts receivable } & 45,000 \
\text { Prepaid insurance } & 10,000 \
\text { Inventory } & 51,300
\end{array}$$ Cramer Cooling's acid-test ratio is 1.25.How much are the company's current liabilities?
A)$76,000
B)$84,000
C)$125,040
D)$117,040

Question

Cramer Cooling Company reported the following results for the year just ended: $$\begin{array} { l r } 
\text { Cash } & \$ 50,000 \
\text { Accounts receivable } & 45,000 \
\text { Prepaid insurance } & 10,000 \
\text { Inventory } & 51,300
\end{array}$$ Cramer Cooling's acid-test ratio is 1.25.How much are the company's current liabilities?
A)$76,000
B)$84,000
C)$125,040
D)$117,040

Quizplus · Accepted Answer

The acid-test ratio is calculated as (Cash + Accounts Receivable + Short-term Investments) / Current Liabilities. Given the acid-test ratio is 1.25 and the sum of Cash, Accounts Receivable, and Prepaid Insurance (since no short-term investments are mentioned, we exclude Prepaid Insurance as it's not liquid) is $50,000 + $45,000 = $95,000. So, $95,000 / Current Liabilities = 1.25. Solving for Current Liabilities gives $95,000 / 1.25 = $76,000.

Cramer Cooling Company Reported the Following Results for the Year