Pritchett Co. reported the following year-end data: Cash $ 25,100 Short-term investments $ 7,800 Accounts receivable (current) $ 17,500 Inventory $ 26,000 Other current assets $ 10,000 Total current liabilities $ 36,000 Compute the (a) current ratio and (b) acid-test ratio.

(a) current ratio is 2.40

(b) acid-test ratio is 1.68

Explanation:

Current ratio is a financial measure that shows how many times the company's short term or current assets are more than the company's current obligations or liabilities. The same goes for acid test ratio except that in the determination of current assets, inventories is not included.

Hence current ratio

= current asset/current liabilities

Acid ratio

= (current assets - inventory) / current liabilities

Current assets = $25100 + $7800 + $17500 + $26000 + $10000

= $86,400

Current asset less inventory = $60,400

Current ratio = $86,400/$36,000

= 2.4

Acid test ratio

= $60,400/$36,000

= 1.68

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