A company has $25 million in cash, $85 million in accounts receivables, $200 mil

Question

A company has $25 million in cash, $85 million in accounts receivables, $200 million in average inventory over the past several years, and other assets of $83 million. Current liabilities are $120 million, and stockholders' equity is $65 million. This year, the company booked $250 million in sales.

From a fundamental analysis perspective, which of the following statements are true?

According to the Acid Test, the company should be able to meet its liabilities over the next year without any difficulty.

Explanation / Answer

Acid test ratio = (Cash + Account Receivabels) / Current Liabilities

= ($85 + $25) / $120

= $110 / $120

= 0.92.

Since, acid test ratio is less than one, so  company cannote able to meet its liabilities over the next year.

Inventory turnover ratio = $250 / $200

= 1.25

So, The company's inventory turns over at least 1 time per year.

So, option (B) is correct answer.

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