Question

question 2

a small electronics retailer has current assets of $100,000, inventory worth $60,000, and current liabilities totaling $80,000.

what is its acid-test ratio, and what does this ratio indicate?

• 0.5, indicating it might have difficulty covering liabilities without selling inventory
• 2.0 indicates it has twice the amount of quick assets compared to liabilities
• 0.75, indicating it has sufficient quick assets to cover liabilities
• 1.25 indicates robust liquidity that does not depend on inventory

Explanation:

Identify given values

Using the Liquidity Analysis knowledge point

$$
LATEXBLOCK0
$$

Calculate the acid-test ratio

Using the Liquidity Analysis knowledge point

$$
LATEXBLOCK1
$$

Interpret the ratio

Using the Liquidity Analysis knowledge point
An acid-test ratio of \(0.5\) is less than \(1.0\), which indicates that the business has only \$0.50 of liquid assets available to cover each \$1.00 of current liabilities if it cannot sell its inventory. Therefore, it might have difficulty covering short-term obligations without relying on inventory sales.

Answer:

• (A) 0.5, indicating it might have difficulty covering liabilities without selling inventory (Correct answer)
• (B) 2.0 indicates it has twice the amount of quick assets compared to liabilities
• (C) 0.75, indicating it has sufficient quick assets to cover liabilities
• (D) 1.25 indicates robust liquidity that does not depend on inventory