Question

In: Accounting

Answer each of the questions in the following unrelated situations. (a) The current ratio of a...

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 $546,000, what is the amount of current liabilities?

Current Liabilities $

  


(b) A company had an average inventory last year of $180,000 and its inventory turnover was 5. 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 $37,000 is inventory and prepaid items) and current liabilities of $37,000. 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 :1
Acid Test Ratio :1
New Current Ratio :1
New Acid Test Ratio :1


(d) A company has current assets of $560,000 and current liabilities of $233,000. The board of directors declares a cash dividend of $169,000. 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

A ?

B ?

C ?

D ?

Solutions

Expert Solution

Answer

a)

Current Ratio = 6:1

Acid Test Ratio = 1:1

Inventories and Prepaid items = $546,000

Current Ratio = Current Assets / Current Liabilities

So,

6:1 = Current Assets : Current Liabilities

Current Assets = 6 * Current Liabilities

Acid Test Ratio = (Current Assets - inventories and Prepaid items) / Current Liabilities

​​​​​​Current Assets - Inventories and Prepaid Items = Current Liabilities (acid test ratio is 1:1)

Now,

6 * Current Liabilities - $546,000 = Current Liabilities

6 * Current Liabilities - Current Liabilities = $546,000

5 * Current Liabilities = $546,000

Current Liabilities = $546,000/5

Current liabilities = $109,200

b)

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Inventory Turnover Ratio in last year was 5

Average inventory in last year was $180,000

So,

5= COGS / $180,000

COGS= 5 * $180,000

COGS = $900,000

Inventory turnover ratio for current year is 8

COGS for current year will be same as previous year since sales volume and unit cost remains same

Now,

8 = COGS / Average Inventory for Current Year

8 = $900,000 / Average Inventory for Current Year

Average inventory for current year = $900,000 / 8

= $112,500

c)

Current Ratio = Current Assets / Current Liabilities

Current Assets = $92,000

Current Liabilities = $37,000

​​​​​​So, Current Ratio = $92,000 / $37,000

= 2.486

= 2.49 (rounded off)

Current Ratio = 2.49 : 1

Acid Test Ratio =(Current Assets - Inventory and Prepaid items) / Current Liabilities

Inventory and Prepaid items = $37,000

Acid Test Ratio = ( $92,000 - $37,000) / $37,000

= $55,000 / $37,000

= 1.486

= 1.49 (rounded off)

Acid Test Ratio = 1.49 : 1

Now, if company borrows $14,000 cash from bank on a 120 day loan

New Current Assets = Current Assets + Cash

= $92,000 + $14,000

= $106,000

New Current Liabilities = Current Liabilities + Loan

= $37,000 + $14,000

= $51,000

New Current Ratio = $106,000 / $51,000

= 2.078

= 2.08 (rounded off)

New Current Ratio = 2.08 : 1

New Acid Test Ratio = ( $106,000 - $37,000) / $51,000

= $69,000 / $51,000

= 1.352

= 1.35 (rounded off)

New Acid Test Ratio = 1.35 :1

d)

Current Ratio = Current Assets / Current Liabilities

Current Assets = $560,000

Current Liabilities = $233,000

Cash dividend is $169,000

Current Ratio after declaration and before payment

Since dividend is only declared and not paid current liability will increase by $169,000 and current assets will remain the same. So,

Current Ratio = $560,000 / ($233,000 + $169,000)

= $560,000 / $402,000

= 1.393

= 1.39 (rounded off)

= 1.39 : 1

Current Ratio after payment of cash dividend

Since cash dividend is paid so current assets will decrease by $169,000 and current liabilities will be same i.e $233,000 ( $233,000 +$169,000 - $169,000) because when the dividend is declared, the current liabilities increases, but when that dividend is paid, current liabilities decreases. So,

Current Ratio = ($560,000 - $169,000) / $233,000

= $391,000 / $233,000

= 1.678

= 1.68 ( rounded off )

= 1.68 : 1


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