Dartmouth Company has a quick ratio of 2.5 to 1. It has current liabilities of $40,000 and noncurrent assets of $70,000. If Dartmouth’s current ratio is 3.1 to 1, its inventory and prepaid expenses must be:
a.$30,000.
b.$24,000.
c.$40,000.
d.$12,400.
Expert Answer
Current Ratio = 3.1 : 1
Total Current Assets / Total Current Liabilties = 3.1 : 1
Total Current Assets / $ 40,000 = 3.1 : 1
Total Current Assets = 3.1 * $ 40,000
= $ 124,000
Quick ratio = (Total Current Assets – Prepaid Expenses – Inventory ) / Current Liabilties
2.5 : 1 = ( $ 124,000 – Prepaid Expenses – Inventory ) / $ 40,000
or 2.5 *$ 40,000 = ( $ 124,000 – Prepaid Expenses – Inventory )
or 100,000 = ( $ 124,000 – Prepaid Expenses – Inventory )
or Prepaid Expenses + Inventory = $ 124,000 – $ 100,000
= $ 24,000
Hence, the correct answer is b. $ 24,000