Question

In: Finance

Jacob Inc has the following ratios: Current Ratio = 1.85 Cash Ratio = .75 Jacob Inc has CURRENT LIABILITIES = $200....

Jacob Inc has the following ratios:

Current Ratio = 1.85

Cash Ratio = .75

Jacob Inc has CURRENT LIABILITIES = $200.

Assume that Jacob’s Current Assets consists of only Cash, Accounts Receivable, and Inventory.

In other words, Current Assets = Cash and Accounts Receivable and Inventory.

How much does Jacob hold in Accounts Receivable and Inventory?

Expert Solution

Solution :

The formula for calculating the Cash Ratio is

Cash Ratio = Cash / Current Liabilities

As per the information given in the question we have

Cash Ratio = 0.75 ; Current Liabilities = $ 200 ; Cash = To find ;

Applying the above information in the formula we have

0.75 = Cash / $ 200

0.75 * $ 200 = Cash

Cash = 0.75 * $ 200 = $ 150

The formula for calculating the Current Ratio is = Current Assets / Current Liabilities

Current Ratio = ( Cash + Account Receivable + Inventory ) / Current Liabilities

As per the information given in the question we have

Current Ratio = 1.85 ; Cash = $ 150 ; Current Liabilities = $ 200 ;

Applying the above values in the formula we have

1.85 = ( $ 150 + Account Receivable + Inventory ) / $ 200

1.85 * $ 200 = $ 150 + Account Receivable + Inventory

$ 370 = $ 150 + Account Receivable + Inventory

$ 370 - $ 150 = Account Receivable + Inventory

Account Receivable + Inventory = $ 370 - $ 150

Account Receivable + Inventory = $ 220

Thus Jacob holds $ 220 in Account Receivable and Inventory.

jeff jeffy answered 2 years ago

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