
Concept Introduction:
Acid- test ratio: It is also known as the
To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Explanation of Solution
Calculation of current ratio and acid test ratio:
Company | Current ratio (Current assets/Current Liabilities) | Acid- test ratio ((Current assets-Inventory-Prepaid Expenses) /Current Liabilities) |
Case X | ||
Case Y | ||
Case Z |
Analysis- The Company which is in a better position to pay its current liabilities out of its current assets:
Generally, current asset ratio of 2:1 or higher is considered to be good. It depicts that the current assets should be twice of its current liabilities while the acid- test ratio of higher than 1 is considered to be good. Liquidity ratios such as current ratio and acid test ratio of less than 1 always show that the current liabilities are more compared to the current assets.
Hence, Case X is in a better position to pay its current liabilities because both the ratios are higher than 1. It indicates that the company has sufficient current assets to pay its dues on time.
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Chapter 5 Solutions
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