A Company Reported the Following Year-End Information Required:
Explain the Purpose of the Acid-Test Ratio

Essay

A company reported the following year-end information:
$$\begin{array} { | l | r | } \hline \text { Cash } & \$ 52,000 \\\hline \text { Short-term investments } & 12,000 \\\hline \text { Accounts receivable } & 54,000 \\\hline \text { Inveritory } & 325,000 \\\hline \text { Prepaid expenses } & 17,500 \\\hline \text { Accounts payable } & 106,500 \\\hline \text { Other current payables } & 25,000 \\\hline\end{array}$$
Required:
Explain the purpose of the acid-test ratio.
Calculate the acid-test ratio for this company.
What does the acid-test ratio reveal about this company?