ACCA Applied Knowledge · Financial Accounting · Ratios
At 31 December, Tarn Co had current assets of $240,000, which included inventory of $90,000, and current liabilities of $120,000. What is the quick (acid test) ratio?
The quick ratio is 1.25:1. It is calculated by removing inventory from current assets, giving $150,000, and dividing by current liabilities of $120,000. Using total current assets would give the current ratio of 2.00, which is not the acid test.
- A1.25:1Correct
- B2.00:1
- C0.75:1
- D2.75:1
Explanation
Quick ratio = (current assets - inventory) / current liabilities = (240,000 - 90,000) / 120,000 = 1.25. The 2.00 option is the current ratio, which fails to remove inventory. The 0.75 option divides inventory by current liabilities.
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