Question

Spartan Sportswear's current assets consist of cash, short-term investments, accounts receivable, and inventory. The following data were abstracted from a recent financial statement:

Inventory	$	270,000
Total assets	$	720,000
Current ratio		2.85
Acid-test ratio		1.35
Debt to equity ratio		1.25

Required:
Compute the shareholders' equity for Spartan:

Answer 1

current asset Ratio = Current assets / Current Liability=2.85

Therefore , Current Asset= 2.85 x Current Liability......(1)

Acid Test Ratio= (Current Asset- Inventory)/ Current Liability=1.35

Inventory=270000(given)

Therefore,1.35= (Current Asset- 270,000)/ Current Liability

or

Current Liability= (Current Asset- 270,000)/ 1.35.......(2)

by putting 2 in 1i.e.Current Liability in 1  

Current Asset= 2.85x { (Current Asset- 270,000)/ 1.35}

Current Asset=2.1111x (Current Asset- 570,000)

Current Asset=2.11111Current Asset- 570,000

$570,000=2.11111Current Asset-Current Asset

1.11111Current assets = $570,000

Current assets = $570,000/1.11111

Current assets =$513,000

By putting in 1 value of current assets

2.85Current Liabilities = $513,000

Current Liabilities = $513,000/2.85

Current Liabilities =$180,000

Now we know that Balance sheet has Debt ,Shareholders Equity and current liabilities on one side and Total assets on other side are  equal

Therefore from debt/Equity ratio =1.25

we know if Debt is 1.25 then equity is 1 and current liability is $180,000 and total assets is given $720,000

Therefore ,Debt +Equity+Current liability= $720,000

and Debt +Equity+$180,000=$720,000

or Debt +Equity=$720,000-$180,000=$540,000

Since Debt is 1.25 of Equity we assume equity as A therefore debt will be 1.25 of A

therefore1.25A+A=$540,000

2.25A=$540,000

A=$$540,000/2.25

A=$240,000=Equity shareholders Fund(Answer)

Note I have taken 2.11111 only it will give Approximation of 0.3 if we take full still it will give approximation to some extent.