Explain the purpose of the acid-test ratio


Response to the following questions:

Q1.XYZ Company uses a periodic inventory system. The beginning balance of inventory and the purchases made by XYZ during the month of July are given below:

Date

Description

Units

Unit cost

Total cost

July 01

Beginning inventory

500

$20

$10,000

July 18

Inventory purchased

800

$24

$19,200

July 25

Inventory purchased

700

$26

$18,200



 

 

 


Total

2,000


$47,400

 

 

 

 

 

The XYZ Company sold 1,400 units during the month of July.

Required: Compute inventory on 31st July and cost of goods sold for the month of July using FIFO inventory costing method.

Q2. ALPHA Company reported the following year-end information:  

Cash

$ 52,000

Short-term investments

12,000

Accounts receivable

54,000

Inventory

325,000

Prepaid expenses

17,500

Accounts payable

106,500

Other current payables

25,000

Instructions:

1- Explain the purpose of the acid-test ratio.

2- Calculate the acid-test ratio for ALPHA Company.

Q3. Maia's Bike Shop uses the periodic inventory system and had the following transactions during the month of May:  

May 3

Sold merchandise to a customer on credit for $600, terms 2/10, n/30.  The cost of the merchandise sold was $350.

May 4

Sold merchandise to a customer for cash of $425.  The cost of the merchandise was $250.

May 6

Sold merchandise to a customer on credit for $1,300, term 2/10, n/30.  The cost of the merchandise sold was $750.

May 8

The customer from May 3 returned merchandise with a selling price of $100.  The cost of merchandise returned was $55.

May 15

The customer from May 6 paid the full amount due, less any appropriate discounts earned.

May 31

The customer from May 3 paid the full amount due, less any appropriate discounts earned.

Instructions:

Prepare the required journal entries that Maia's Bike Shop must make to record these transactions. 

Q.4 What does FOB stand for? Differentiate between FOB shipping point (or FOB factory) and FOB destination? 

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Financial Accounting: Explain the purpose of the acid-test ratio
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