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Chapter 4: 4-12QS (page 207)

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

\(1,490

Prepaid expenses

\)700

Accounts receivables

2,800

Accounts payable

5,750

Inventory

6,000

Other current liabilities

850

Short Answer

Expert verified

The acid test ratio is0.65.

Step by step solution

01

Definition of Accounts Payable

Accounts payable can be defined as the current liability account that represents revenue still not received from the customer to whom credit sales were made.


02

Acid test ratio

The acid test ratio of the business entity is not good because it is lower than the ideal ratio, which is equal to 1 time.[l1]

Acid test ratio determines the ability of a business entity to pay bills as they become due. It reflects the short-term ability of a business.


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Most popular questions from this chapter

Nix’It Company’s ledger on July 31, its fiscal year-end, includes the following selected accounts that have normal balances (Nix’It uses the perpetual inventory system).

Merchandise inventory

\(37,800

Sales return and allowances

\)6,500

Retained earnings

115,300

Cost of goods sold

105,000

Dividends

7,000

Depreciation expenses

10,300

Sales

160,200

Salaries expenses

32,500

Sales discount

4,700

Miscellaneous expenses

5,000

A physical count of its July 31 year-end inventory discloses that the cost of the merchandise inventory still available is $35,900. Prepare the entry to record any inventory shrinkage.

Med Labs has the following December 31, 2017, year-end unadjusted balances: Allowance for Sales Discounts, \(0; and Accounts Receivable, \)5,000. Of the \(5,000 of receivables, \)1,000 are within a 2% discount period, meaning that it expects buyers to take \(20 in future-period discounts arising from this period’s sales.

a. Prepare the December 31, 2017, year-end adjusting journal entry for future sales discounts.

b. Assume the same facts above and that there is a \)5 year-end unadjusted credit balance in the Allowance for Sales Discounts. Prepare the December 31, 2017, year-end adjusting journal entry for future sales discounts.

c. Is Allowance for Sales Discounts a contra asset or a contra liability account?

Allied Merchandisers was organized on May 1. Macy Co. is a major customer (buyer) of Allied (seller) products. Prepare journal entries to record the following transactions for Allied assuming it uses a perpetual inventory system and the gross method. (Allied estimates returns using an adjusting entry at each year-end.)

May 3 Allied made its first and only purchase of inventory for the period on May 3 for 2,000 units at a price of \(10 cash per unit (for a total cost of \)20,000).

5 Allied sold 1,500 of the units in inventory for \(14 per unit (invoice total: \)21,000) to Macy Co. under credit terms 2∕10, n∕60. The goods cost Allied \(15,000.

7 Macy returns 125 units because they did not fit the customer’s needs (invoice amount: \)1,750). Allied restores the units, which cost \(1,250, to its inventory.

8 Macy discovers that 200 units are scuffed but are still of use and, therefore, keeps the units. Allied sends Macy a credit memorandum for \)300 toward the original invoice amount to compensate for the damage.

15 Allied receives payment from Macy for the amount owed on the May 5 purchase; payment is net of returns, allowances, and any cash discount.

Compute the amount to be paid for each of the four separate invoices assuming that all invoices are paid within the discount period.

Merchandise (gross)

Terms

Merchandise (gross)

Terms

a. \(5,000

2∕10, n∕60

c. \)75,000

1∕10, n∕30

b. \(20,000

1∕15, EOM

d. \)10,000

3∕15, n∕45

What is the difference between the single-step and multiple-step income statement formats?
See all solutions

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