Presented below is information available for Marley Company. Total current liabilities are $100,000. The acid-test ratio for Marley is:
A) 2.80 to 1
B) 2.40 to 1
C) 1.30 to 1
D) 0.69 to 1

Question

Presented below is information available for Marley Company.  Total current liabilities are $100,000. The acid-test ratio for Marley is:
A) 2.80 to 1 
B) 2.40 to 1 
C) 1.30 to 1 
D) 0.69 to 1

Quizplus · Accepted Answer

The acid-test ratio excludes inventory from the calculation of current assets, so we need to use only the information given about current liabilities. The formula for the acid-test ratio is (current assets - inventory) / current liabilities. Since we don't have inventory information, we can assume it's included in current assets, so the formula becomes current assets / current liabilities. We don't have information about current assets, so we can't calculate the ratio directly, but we know that it must be less than or equal to the current ratio, which includes inventory. If the current ratio is 3 to 1 (for example), the acid-test ratio must be lower than that, because it excludes inventory. The only answer choice that is less than the current ratio of 4 to 1 is C, which is 1.30 to 1.

Presented Below Is Information Available for Marley Company