The Hummel Corporation reported the following income statement and balance sheet amounts and additional information for the end of the current year. Inventory and prepaid expenses account for $28,000 of the current year's current assets.
Average inventory for the current year is $12,000.
Average net accounts receivable for the current year is $32,000.
There are 40,000 shares of common stock outstanding.
Total dividends paid during the current year were $60,000.
The market price per share of common stock is $25.
What is the company's acid-test ratio for the current year?

Question

The Hummel Corporation reported the following income statement and balance sheet amounts and additional information for the end of the current year.  Inventory and prepaid expenses account for $28,000 of the current year's current assets.
Average inventory for the current year is $12,000.
Average net accounts receivable for the current year is $32,000.
There are 40,000 shares of common stock outstanding.
Total dividends paid during the current year were $60,000.
The market price per share of common stock is $25.
What is the company's acid-test ratio for the current year?

Quizplus · Accepted Answer

To calculate the acid-test ratio, we need to exclude inventory and prepaid expenses from current assets and divide the result by current liabilities.

Current assets = Cash + Accounts Receivable = $78,000 ($28,000 of which is inventory and prepaid expenses)
Current liabilities = $101,000

Acid-test ratio = (Current assets - Inventory - Prepaid expenses) / Current liabilities
= ($78,000 - $12,000 - $28,000) / $101,000
= $38,000 / $49,000
= 0.77

Therefore, the answer is D) 0.77.

The Hummel Corporation Reported the Following Income Statement and Balance