Question

Please refer to Table 4−1 for the following questions.

Stewart Company

Balance Sheet

​Assets:	​	​
Cash and marketable securities	​	​$600,000
Accounts receivable	​	​900,000
Inventories	​	​1,500,000
Prepaid expenses	​	​75,000
Total current assets	​	​$3,075,000
Fixed assets	​8,000,000	​
​Less: accum. depr.	​(2,075,000)	​
Net fixed assets	​	​$5,925,000
Total assets	​	​$9,000,000
​	​	​
​Liabilities:	​	​
Accounts payable	​	​$800,000
Notes payable	​700,000
Accrued taxes	​	​50,000
Total current liabilities	​	​$1,550,000
Longminus−term debt	​	​2,500,000
​Owner's equity​ (1 million shares of common stock​ outstanding)	​	​4,950,000
Total liabilities and​ owner's equity	​	​$9,000,000
​	​	​
Net sales​ (all credit)	​	​$10,000,000
​Less: Cost of goods sold	​	​(3,000,000)
Selling and administrative expense	​	​(2,000,000)
Depreciation expense	​	​(250,000)
Interest expense	​	​(200,000)
Earnings before taxes	​	​4,550,000
Income taxes	​	​(1,820,000)
Net income	​	​$2,730,000

Based on the information in Table

4−​1,the acid−test ratio is

A.1.71.

B.0.98.

C.1.67.

D. 1.02

Answer 1

The acid-test ratio is computed as shown below:

= ( Total current assets - Inventories ) / Total current liabilities

= ( $ 3,075,000 - $ 1,500,000 ) / $ 1,550,000

= $ 1.02 Approximately

So the correct answer is option D i.e. 1.02

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