Using the data calculate the acid testCompany Income Statement For Year Ending December 31                           2010   2009                 Sales (on all accounts)    ...

Using the data calculate the acid test

Company 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                                                                                                

Asked on by yacel0762

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justaguide | College Teacher | (Level 2) Distinguished Educator

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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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