Question & Answer: 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 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

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