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(a)The current ratio of a company is 5:1 and its acid-test ratio is 1:1
(a)The current ratio of a company is 5:1 and its acid-test ratio is 1:1. If the inventories and prepaid items amount to $537,000, what is the amount of current liabilities? Current Liabilities $ (b) A company had an average inventory last year of $199,000 and its inventory turnover was 5. If sales volume and unit cost remain the same this year as last and inventory turnover is 8 this year, what will average inventory have to be during the current year? (Round answer to O decimal places, e.g. 125.) Average Inventory $
(c) A company has current assets of $82,000 (of which $37,000 is inventory and prepaid items) and current liabilities of $37,000. What is the current ratio? What is the acid-test ratio? If the company borrows $15,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the acid-test ratio be? (Round answers to 2 decimal places, e.g. 2.50.) Current Ratio :1 Acid Test Ratio :1 New Current Ratio :1 New Acid Test Ratio :1 (d) A company has current assets of $587,000 and current liabilities of $228,000. The board of directors declares a cash dividend of $170,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend? (Round answers to 2 decimal places, e.g. 2.50.) Current ratio after the declaration but before payment :1 Current ratio after the payment of the dividend :1
Expert Solution
(a) Current ratio= Current assets / current liabilities = 5:1
Acid test ratio = (Current assets- inventory) / current liabilities = 1:1
Inventory= $537,000
As given,
Current Assets = 5x and Current Assets - Inventory = 1x
Current liabilities 1x Current Liabilities 1x
So, Inventory = Current assets - 1x = 5x - 1x = 4x ( ratio)
So, on 4x = $537,000
x = 134,250
So, current liabilities= 1x = $134,250
(b) Average inventory = $199,000 (last year)
Inventory turnover ratio= 5 ( last year)
Inventory turnover ratio = 8 ( current year)
Inventory turnover ratio = cost of goods sold
Average Inventory
Last year:
Cost of goods sold = 5 × $199,000 = $995,000
It is given that sales volume and cost remains same that is cost of goods sold for current year is same as last year which is $995,000
So, average Inventory = COGS / Inventory turnover ratio
= $995,000 / 8 = $124,375
(c) current assets = $82,000
Inventory= $37,000
Current liabilities = $37,000
Current ratio= current assets/current liabilities = $8200/$37000 = 2.22
Acid test ratio= (current assets- inventory ) / current liabilities
= $45,000 / $37,000 = 1.22
On borrowing $15000 cash, current assets= $82,000 + $15,000 = $97000
Current liabilities= $37000 + $15000 = $52000
So, current ratio = $97000 / $52000 =1.87
Acid test ratio = ($97000 - $37000 )/ $52000 = 1.15
(d) On declaring a cash dividend, the liability increases as dividend payable is increased. But as for now it's not paid but only declared so no affect on current asset.
Current Assets= $587,000
Current liabilities = $228,000 + $170,000 = $398,000
So, current ratio after declaration but before payment = 1.47
After payment of dividend, current assets decreses by the amount paid as dividend and current liabilities decreases.
So, current assets = $587000 - $170,000 = $417,000
Current liabilities= 228,000
Current ratio = $417000 / $228,000 = 1.83
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