Question

Assume that the current ratio for Arch Company is 3.5, its acid-test ratio is 1.5, and its working capital is $330,000. Answer each of the following questions independently, always referring to the original information.

Required:

a. How much does the firm have in current liabilities? (Do not round intermediate calculations.)

b. If the only current assets shown on the balance sheet for Arch Company are Cash, Accounts Receivable, and Merchandise Inventory, how much does the firm have in Merchandise Inventory? (Do not round intermediate calculations.)

c. If the firm collects an account receivable of $102,000, what will its new current ratio and working capital be? (Round "Current ratio" to 1 decimal place.)

d. If the firm pays an account payable of $58,000, what will its new current ratio and working capital be? (Do not round intermediate calculations. Round "Current ratio" to 1 decimal place.)

e. If the firm sells inventory that was purchased for $50,000 at a cash price of $58,000, what will its new acid-test ratio be? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Answer 1

Solution a:

Current ratio = 3.5

Current Asset / Current liabilities = 3.5

Working capital = $330,000

Current Assets - Current Liabilities = $330,000

Current Assets = $330,000 + Current liabilities

($330,000 + Current Liabilities) / Current Liabilities= 3.5

$330,000 + Current liabilities = 3.5 Current liabilities

Current liabilities = $330,000 / 2.50 = $132,000

Current Asset = $132,000 + $330,000 = $462,000

Solution b:

Acid test ratio = 1.5

Quick assets / Current liabilities = 1.5

Quick Assets = 1.5 * $132,000 = $198,000

Merchandise inventory = Current assets - Quick assets = $462,000 - $198,000 = $264,000

Solution c:

If firm collects an accounts receivables of $102,000 then it will not result any increase or decrease in current assets or current liabilities, therefore current ratio and working capital wil remain the same i.e.

Current ratio = 3.5

Working capital = $330,000

Solution d:

If the firm pays an account payable of $58,000, then new current liabilities = $132,000 - $58,000 = $74,000

New Current Assets = $462,000 - $58,000 = $404,000

New Current ratio = $404,000 / $74,000 = 5.5

New working capital = $404,000 - $74,000 = $330,000

Solution e:

New quick assets = $198,000 + $58,000 = $256,000

Current liabilities = $132,000

New acid test ratio = $256,000 / $132,000 = 1.9