Harwichport Company has a current ratio of 3.5 and an acid-test ratio of 2.8. Current assets equal $175,000 of which $5,000 consists of prepaid expenses. The remainder of current assets consists of cash, accounts receivable, marketable securities, and inventory. Harwichport Company's inventory must be:
A) $30,000
B) $40,000
C) $50,000
D) $35,000

Question

Quizplus · Accepted Answer

The acid-test ratio is calculated by dividing the sum of cash, marketable securities, and accounts receivable by current liabilities. In this case, the acid-test ratio is 2.8, which means that the sum of cash, marketable securities, and accounts receivable is 2.8 times the current liabilities. Since the current assets equal $175,000 and the prepaid expenses equal $5,000, the sum of cash, marketable securities, and accounts receivable is $175,000 - $5,000 = $170,000. Therefore, the inventory must be $175,000 - $170,000 = $5,000.

Harwichport Company Has a Current Ratio of 3