Chapter 13, Problem 7QS

To determine

Current Ratio:

Current ratio represents the ability of the company to repay its current liabilities. The formula to calculate current ratio is,

$\text{Current ratio }=\frac{\text{Current assets }}{\text{Current liabilities}}$.

Acid test ratio:

Acid test ratio represents the capability of the company to pay its current liabilities by utilizing its quick assets, that is assets which be turned into cash within 90 days. The formula to calculate acid test ratio is,

$\begin{array}{l}\text{Quick acid ratio}=\frac{\text{Quick assets}}{\text{Current liabilities}}\\ \end{array}$

The formula to calculate quick assets is,

$\text{Quick assets}=\text{Current assets }-\text{Inventory}-\text{Prepaid expenses}$

To prepare: Report on ability of the M Company and P Company to meet current obligations and to use current assets efficiently.