Question

Account	Current Year	Prior Year
Net sales (all credit)	$445,400	$362,000
Costs of goods sold	$220,000	$185,000
Gross profit	$225,400	$177,000
Income from operations	$72,000	$80,000
Interest expense	$8,000	$14,000
Net income	$40,000	$35,000
Cash	$34,000	$28,000
Accounts receivable, net	$42,000	$62,000
Inventory	$120,000	$100,000
Prepaid expenses	$4,000	$2,000
Total current assets	$200,000	$192,000
Total long-term assets	$200,000	$230,000
Total current liabilities	$100,000	$165,000
Total long-term liabilities	$44,000	$95,000
Common stock, no par, $8,000 shares, value $120/share	$80,000	$80,000

D. What is the current ratio for the current and prior year? (show work) What does the current ratio tell you?

Answer 1

Current Ratio = Current Assets / Current Liabilities

Current Year = $200,000 / $100,000 = 2:1

Prior Year = $192,000/$165,000 = 1.16 :1

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payable.

From the above ratios it can be seen that in current year , company is more liquid and in better position to pay off its debt than in prior year.