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 $544,000, what is the amount of current liabilities?

Current Liabilities

$enter current liabilities in dollars

(b) A company had an average inventory last year of $200,000 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

$enter the average inventory in dollars rounded to 0 decimal places

(c) A company has current assets of $99,000 (of which $39,000 is inventory and prepaid items) and current liabilities of $39,000. What is the current ratio? What is the acid-test ratio? If the company borrows $17,000 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		enter the ratio rounded to 2 decimal places	:1
Acid Test Ratio		enter the ratio rounded to 2 decimal places	:1
New Current Ratio		enter the ratio rounded to 2 decimal places	:1
New Acid Test Ratio		enter the ratio rounded to 2 decimal places	:1

(d) A company has current assets of $654,000 and current liabilities of $240,000. The board of directors declares a cash dividend of $183,000. 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		enter the ratio rounded to 2 decimal places	:1
Current ratio after the payment of the dividend		enter the ratio rounded to 2 decimal places	:1

Answer 1

(a) Current Liabilities: $108,800

Acid test ratio = Quick Assets / Current Liabilities = 1:1

Current ratio = Current Assets / Current Liabilities = 6:1

By this, it can be determined that

Quick Assets x 6 = Current Assets

Now,

Quick Assets + 544,000 = Current Assets

Quick Assets + 544,000 = Quick Assets x 6

Quick Assets = 544,000 / 5

Quick Assets = 108,800

.

Current Liabilities:

= Quick Assets / Acid test ratio

= 108,800 / 1

= 108,800

.

(b) Average Inventory: $150,000

Last Year:

Average Inventory	$200,000
Inventory turnover	6

Last year sales:

= Average Inventory x Inventory turnover

= 200,000 x 6

= $1,200,000

.

Current Year:

Sales	$1,200,000
Inventory turnover	8

Average Inventory fo current year:

= Sales / Inventory turnover

= 1,200,000 / 8

= $150,000

.

(c)

Current Ratio	2.54
Acid Test Ratio	1.54
New Current Ratio	2.07
New Acid Test Ratio	1.38

Given that:

Current Assets	99,000
Quick Assets	60,000
Current Liabilities	39,000

.

Current Ratio	Acid Test Ratio
= Current Assets / Current Liabilities = 99,000 / 39,000 = 2.54	= Quick Assets / Current Liabilities = 60,000 / 39,000 = 1.54

Now,

New data Given:

Current Assets	116,000
Quick Assets	77,000
Current Liabilities	56,000

.

New Current Ratio	New Acid Test Ratio
= Current Assets / Current Liabilities = 116,000 / 56,000 = 2.07	= Quick Assets / Current Liabilities = 77,000 / 56,000 = 1.38

.

(d)

Current ratio after the declaration but before payment	1.55
Current ratio after the payment of the dividend	1.96

.

Given that:

Current Assets	654,000
Current Liabilities	240,000

.

Scenario after the declaration but before payment of $183,000:

Current Assets	654,000
Current Liabilities	423,000

Current ratio after the declaration but before payment:

= Current Assets / Current Liabilities

= 654,000 / 423,000

= 1.55

.

Scenario after the payment of the dividend of $183,000:

Current Assets	471,000
Current Liabilities	240,000

Current ratio after the payment of the dividend

= Current Assets / Current Liabilities

= 471,000 / 240,000

= 1.96