Using the data calculate the acid testCompany Income Statement For Year Ending December 31 2010 2009 Sales (on all accounts) 600,000 520,000 Expenses COGS 415,000 354,000 Selling and Administrative 123,800 114,800 Interest Expense 7,800 6,000 Income Tax Expense 18,000 14,000 Total Expenses 564,600 488,800 Net Income 35,400 31,200
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The acid test ratio is used to determine the ability of a company to make payments in order to fulfill its liabilities. This is given by a ratio of the current assets of the company and its current liabilities. In the acid test ratio, the inventory of the company is not included as part of the current assets. Only cash available with the company, receivables and short term investments are included to arrive at the current assets. The acid test ratio is a more strict measure of the ability of a company to honor its liabilities and not default on them.
In the balance sheet of the company given it can be seen that there is no mention made of the inventory with the company. The current assets are only the sales made by the company and all the expenses of the company are current liabilities.
For the year ending December 31 2009, the acid test ratio is: 520000/488800 = 1.064 and for the year ending December 31 2010, the acid test ratio is 600000/564600 = 1.063
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