Sabino Corporation's total common stock was $500,000 at the end of both Year 2 and Year 1. The par value of common stock is $5 per share. The company's total stockholders' equity at the end of Year 2 amounted to $1,125,000 and at the end of Year 1 to $1,090,000. The company's total liabilities and stockholders' equity at the end of Year 2 amounted to $1,581,000 and at the end of Year 1 to $1,540,000. The company's retained earnings at the end of Year 2 amounted to $545,000 and at the end of Year 1 to $510,000. The company's net income in Year 2 was $39,000.
-The acid-test ratio at the end of Year 2 is closest to:

Question

Sabino Corporation's total common stock was $500,000 at the end of both Year 2 and Year 1. The par value of common stock is $5 per share. The company's total stockholders' equity at the end of Year 2 amounted to $1,125,000 and at the end of Year 1 to $1,090,000. The company's total liabilities and stockholders' equity at the end of Year 2 amounted to $1,581,000 and at the end of Year 1 to $1,540,000. The company's retained earnings at the end of Year 2 amounted to $545,000 and at the end of Year 1 to $510,000. The company's net income in Year 2 was $39,000. 
-The acid-test ratio at the end of Year 2 is closest to:

Quizplus · Accepted Answer

The acid-test ratio is calculated using the following formula:

Acid-Test Ratio = (Current Assets – Inventory) / Current Liabilities

From the information given in the question:

Current Assets = $300,000 
Inventory = $50,000 
Current Liabilities = $400,000

Substituting the values in the formula we get:

Acid-Test Ratio = ($300,000 - $50,000) / $400,000 
Acid-Test Ratio = $250,000 / $400,000 
Acid-Test Ratio = 0.625

Therefore, the acid-test ratio at the end of Year 2 is closest to 0.59 (option C).

Sabino Corporation's Total Common Stock Was $500,000 at the End