Question

Answer each of the questions in the following unrelated situations. (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 $497,000, what is the amount of current liabilities? Current Liabilities $ (b) A company had an average inventory last year of $204,000 and its inventory turnover was 6. 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 0 decimal places, e.g. 125.) Average Inventory $ (c) A company has current assets of $87,000 (of which $43,000 is inventory and prepaid items) and current liabilities of $43,000. What is the current ratio? What is the acid-test ratio? If the company borrows $14,000 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 Acid Test Ratio New Current Ratio New Acid Test Ratio (d) A company has current assets of $616,000 and current liabilities of $221,000. The board of directors declares a cash dividend of $168,000. 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 Current ratio after the payment of the dividend

Answer 1

a)
Current Ratio = Current Assets / Current Liabilities
Acid Test Ratio = (Current Assets - Inventories - prepaid expenses)/ current liabilities
the curent ratio converted in to acid test ratio
from 5:1 to 1:1 only because of inventories and prepaid exepenses
therefore we can say that inventories and prepaid expenses has weight of 4 i.e. 5-4
Therefore current asset would be =$497000/4*5
	=$621250
And Current liabilities = $621250/5
=$124250
b)	Inventory Turnover Ratio = Cost of goods sold / average inventory
	6 =Cost Of Goods Sold /$204000
	Cost Of Goods Sold =$1224000
	In the current year cost of goods sold is remained the same therefore
	average inventory would be
	=$1224000/8
	=$153000
c)
Current Ratio = Current Assets / Current Liabilities
= $87000/43000
=2.02 times
Acid Test Ratio = Quick Assets / Current Liabilities
= $44000/43000
=1.02 times
New Current Ratio = Current Assets / Current Liabilities
= $101000/57000
=1.77 times
New Acid Test Ratio = Quick Assets / Current Liabilities
= $58000/57000
=1.02 times
d) Current Ratio Before payment of Dividend
Current Ratio = Current Assets / Current Liabilities
= $616000/389000
=1.58 times
Current Ratio = Current Assets / Current Liabilities
= $448000/221000
=2.03 times