A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio?
a. 0.11
b. 0.78
c. 1.75
d. 2.11
Answer:B
Choice "b" is correct.
The acid-test or quick ratio is the ratio of the most liquid assets to current liabilities and provides an even more rigorous test of liquidity than the current ratio. The quick ratio excludes less liquid current assets from the numerator (e.g., prepaid expenses and inventory) and
includes only such line items as cash and accounts receivable as provided in the problem. The quick ratio would be computed as follows:
Choice "a" is incorrect. The quick ratio does not limit assets to cash only.
Choice "c" is incorrect. The quick ratio is not the ratio of the most liquid assets to the most current liabilities.
Choice "d" is incorrect. The quick ratio is computed in the manner shown in response "b" above.