Question

(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?

(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?

(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?

(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?

Answer 1

Ans:

a.

Current Raio : 6:1

Current Ratio : Current Assets / Current liability

current asset : 6*Current liability

Acid Test Ratio : 1:1

Acid Test Ratio : Current Assets - Inventory / Current liability

(Current Asset - 544,000)/ Current Liability = 1

(6*Current Liability - 544,000 = Current liability

5*Current Liability = 544,000

Current Liabilty : 544,000 / 5 = 108,800

b.

Average Inventory Last Year : $200,000

Inventory Turnover : 6

Turnover last year : $200,000*6 = $1,200,000

Turn over current year : $1,200,000 (given in question same as previous year)

Inventory Turnover current year : 8

Average Inventory current year : $1,200,000 / 8 = $150,000

c.

Current Asset : $99,000

Current Liability : $39,000

Current Ratio : $99,000 / $39,000 = 2.54

Acid Test Ratio : Current Assets - Inventory / Current liability

= ($99,000 - $39,000) / 39,000 = 1.54

If Amount borrowed $17,000

Current Asset : $99,000 + $17,000 = $116,000

Current Liability : $39,000 + $17,000 = $56,000

Current Ratio : $116,000 / $56,000 = 2.07

Acid Test Ratio : Current Assets - Inventory / Current liability

= ($116,000 - $39,000) / 56,000 = 1.375 or 1.38

d.

Current Asset : $654,000

Current Liability : $240,000

Dividend Declared : $183,000

Current Ratio Before Payment : $654,000 / ($240,000 + $183,000) = 1.55

Current Ratio After Payment : ($654,000 - $183,000) / $240,000 = 1.96

For any query please ask in comment box, we are happy to help you. Also please don't forget to provide your valuable feedback. Thanks!