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Which of the following is included in calculating the current ratio, but excluded in calculating the acid-test ratio? Prepaid expenses Cash Accounts Receivable Current investments
Which of the following is included in calculating the current ratio, but excluded in calculating the acid-test ratio?
- Prepaid expenses
- Cash
- Accounts Receivable
- Current investments
Expert Solution
The correct option is 1st "Prepaid Expenses". As we know,
Current Ratio = Total Current Assets/Total Current Liabilities
Here,
Current Assets include all current assets like cash, accounts receivables, marketable securities or prepaid expenses etc.
Acid-test Ratio = Total Liquid Assets/Total Current Liabilities
Here,
Liquid assets include only cash, marketable securities and accounts receivables. It does not include prepaid expenses and inventory.
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