Dennisport Corporation has an acid-test ratio of 2.6. It has current liabilities of $49,000 and noncurrent assets of $79,000. The corporation's current assets consist of cash, marketable securities, accounts receivable, prepaid expenses, and inventory. If Dennisport's current ratio is 4.1, its inventory and prepaid expenses must be:
A) $121,900
B) $73,500
C) $123,000
D) $78,000

Question

Quizplus · Accepted Answer

The acid-test ratio excludes inventory and prepaid expenses. Using the acid-test ratio (2.6), we find quick assets: 2.6 = Quick Assets / $49,000, so Quick Assets = $127,400. The current ratio (4.1) includes all current assets: 4.1 = Current Assets / $49,000, so Current Assets = $200,900. Inventory and prepaid expenses = Current Assets - Quick Assets = $200,900 - $127,400 = $73,500.

Dennisport Corporation Has an Acid-Test Ratio of 2