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 $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 ?

Answer 1

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