Question

Answer each of the questions in the following unrelated situations.

(a) The current ratio of a company is 6:1 and its acid-test ratio is 1:1. If the inventories and prepaid items amount to $463,000, what is the amount of current liabilities?

Current Liabilities

$

(b) A company had an average inventory last year of $209,000 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 $92,000 (of which $44,000 is inventory and prepaid items) and current liabilities of $44,000. 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 $621,000 and current liabilities of $246,000. The board of directors declares a cash dividend of $190,000. 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

Answer 1

(a)Current ratio=current assets/current liabilities

6/1=current assets/current liabilities

Current assets=6 current liabilities

Acid test ratio=(current assets-inventory and prepaid items)/current liabilities

Current liabilities=(6 current liabilities-$463,000)

5 current liabilities=$463,000

Current liabilities=$463,000/5

Current liabilities=$92,600

(b)Inventory turnover=cost of goods sold/average inventory

Last year :

6=cost of goods sold/$209,000

Cost of goods sold=$1,254,000

Inventory turnover this year=$1,254,000/8

Inventory turnover this year=$156,750

(c)Current ratio=current assets/current liabilities

Current ratio=$92,000/$44,000

Current ratio=2.09:1

Acid test ratio=(92,000-$44,000)/$44,000

Acid test ratio=1.09:1

New current ratio=($92,000+$15,000)/($44,000+$15,000)

New current ratio=$107,000/$59,000

New current ratio=1.81:1

New acid test ratio=($107,000-$44,000)/$59,000

New acid test ratio=1.07:1

(d)Before dividend payment

Current ratio=$621,000/($246,000+$190,000)

Current ratio=$621,000/$436,000

Current ratio=1.42:1

After dividend declaration

Current ratio=($621,000-$190,000)/$246,000

Current ratio=$431,000/$246,000

Current ratio=1.75:1