Question

HELP! The current asset section of Stibbe Pharmaceutical Company’s balance sheet included cash of $26,000 and accounts receivable of $46,000. The only other current asset is inventory. The company’s current ratio is 2.1 and its acid-test ratio is 1.6.

Determine the ending balance in inventory and total current liabilities.

The current asset section of Stibbe Pharmaceutical Company's balance sheet included cash of $26,000 and accounts receivable of $46,000. The only other current asset is inventory. The company's current ratio is 2.1 and its acid-test ratio is 1.6. Determine the ending balance in inventory and total current liabilities. Inventory Current liabilities

Answer 1

(The ending balance in inventories is $ 22500 and total current liability is $ 45000)

Explanation: step by step solution for your better understanding.

Given:

Cash included in company's balance sheet, C = $ 26,000

Accounts receivables, AR = $ 46,000

Current ratio = 2.1

Acid-test ratio = 1.6

Now,

The current ratio is given as:

Current ratio = (C + AR + inventory) / current liabilities

thus,

on substituting the values, we get

2.1 = ($ 26000 + $ 460000 + inventory) / current liabilities

let the inventory be 'i'

and the current liability be 'L'

2.1 = (72000 + i) / L

or

2.1L - $ 72000 = i ...............(1)

also,

= Acid-test ratio is given as:

Acid-test ratio = (C + AR) / current liabilities

on substituting the values, we get

1.6 = ($ 26000 + $ 46000) / current liabilities

or

1.6 = $ 72000 / L

or

(L = $ 45000)

= Substituting the value of current liability in equation (1), we have

i = 2.1 × $ 45000 - $ 72000

or

(i = $ 22500)

Hence,

the ending balance in inventories is $ 22500 and total current liability is $ 45000

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