ExpertEasy1 markMultiple Choice
ACCA · Question 59 · Interpretation of financial statements
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
To calculate the Quick Ratio (Acid Test), which item must be deducted from Current Assets?
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
To calculate the Quick Ratio (Acid Test), which item must be deducted from Current Assets?
Answer options:
A.
Trade Receivables
B.
Cash and Cash Equivalents
C.
Inventory
D.
Prepayments
How to approach this question
Recall the formula for the Quick Ratio: (Current Assets - Inventory) / Current Liabilities.
Full Answer
C.Inventory✓ Correct
The Quick Ratio (or Acid Test) measures a company's ability to meet its short-term obligations with its most liquid assets. Inventory is deducted from Current Assets because it is generally the least liquid current asset (it takes time to sell and then collect the cash).
Common mistakes
Deducting receivables instead of inventory.
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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