A Level Accounting (9706)•9706/11/M/J/23
Explanation
Equal current and acid-test ratios mean zero inventory
Steps:
- Current ratio formula: Current assets (CA) / Current liabilities (CL) = 2.5:1.
- CL = 4000 = $10,000.
- Acid-test ratio formula: Quick assets (QA) / CL = 2.5:1, where QA = CA - Inventory.
- QA = 2.5 × 10,000, so Inventory = 10,000 = $0.
Why A is correct:
- A cannot be correct; the ratios being equal defines zero inventory per standard liquidity formulas.
Why the others are wrong:
- B. 6000 and acid-test ratio of 1.5:1, contradicting given 2.5:1.
- C. 2000 and acid-test ratio of 0.5:1, contradicting given 2.5:1.
- D. 10,000, impossible under current ratio of 2.5:1.
Final answer: None; $0
Topic: Analysis and communication of accounting information
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