Selected financial data regarding current assets and current liabilities for ACM

Question

Selected financial data regarding current assets and current liabilities for ACME Corporation and Wayne Enterprises, are as follows:

2-a. Calculate the acid-test (quick) ratio for ACME Corporation and Wayne Enterprises. (Enter your answers in millions. (i.e., $5,500,000 should be entered as 5.5.))

why 2,334 for ACME corporation (quick assets is wrong ??

as well as why 849 for Wayne enterprises (quick assets is wrong ??

  ($ in millions) ACME Corporation Wayne Enterprises   Current assets:        Cash and cash equivalents $     407      $    165           Current investments 6      463           Net receivables 706      86           Inventory 10,653      7,409           Other current assets 1,215      135               Total current assets $ 12,987      $ 8,258      Current liabilities:        Current debt $   7,421      $ 4,229           Accounts payable and accrued liabilities 1,687      941           Other current liabilities 1,193      2,375               Total current liabilities $ 10,301      $ 7,545   

2-a. Calculate the acid-test (quick) ratio for ACME Corporation and Wayne Enterprises. (Enter your answers in millions. (i.e., $5,500,000 should be entered as 5.5.))

why 2,334 for ACME corporation (quick assets is wrong ??

as well as why 849 for Wayne enterprises (quick assets is wrong ??

Explanation / Answer

Acid test ratio / Quick ratio: This is used to calculate the efficiency at which the company can solve it current liabilities through its realization of quick assets.

Quick assets: Assets which can be realized in a very quick span of time say for less than 90 days. It excludes inventories and other prepayments

Current assets: Assets which are realized with a year which includes inventories and all other kinds of prepayments.

1. Quick ratio for ACME corporation = Current assets - inventories / Current liabilities

= 12987 - 10653 / 10301 = 2334 / 10301 = 0.226

2. Quick ratio for Wayne enterprise = Current assets - inventories/ Current liabilities

= 8258 - 7409 / 7545 = 849 / 7545 = 0.1125

Quick ratio for ACME corporation is higher compared to Wayne enterprise which means ACME can solve its current liabilities quicker than Wayne enterprises.

* Quick assets in both the categories include 'other current assets' as prepayments are not specifically mentioned in that. if so, other current assets is deducted from the current assets to obtain quick assets then

1. For ACME corporation = 0.1086

2, For Wayne enterprises = 0.0946

Also, the reason for 2334 or 849 is provided above including or excluding the 'other current assets'. Quick assets are not wrong but provided the above condition is known.

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