1. Use the following information on current assets and current liabilities to compute and interpret the acid test ratio. Explain what the acid test ratio of a company measures.
|
Cash |
$1,200 |
Prepaid expenses |
$ 600 |
|
Accounts receivable |
2,700 |
Accounts payable |
4,750 |
|
Inventory |
5,000 |
Other current liabilities |
950 |
2. Identify similarities and differences between the acid test ratio and the current ratio. Compare and describe how the two ratios reflect a company’s ability to meet its current obligations.