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Exercise 13-7 Analyzing liquidity LO P3 Simon Company’s year-end balance sheets follow. At December 31 Current...

Exercise 13-7 Analyzing liquidity LO P3

Simon Company’s year-end balance sheets follow.

At December 31 Current Yr 1 Yr Ago 2 Yrs Ago
Assets
Cash $ 36,582 $ 41,922 $ 44,106
Accounts receivable, net 103,946 74,831 59,390
Merchandise inventory 134,613 97,914 63,889
Prepaid expenses 11,781 11,115 4,755
Plant assets, net 320,949 298,245 268,960
Total assets $ 607,871 $ 524,027 $ 441,100
Liabilities and Equity
Accounts payable $ 149,846 $ 90,332 $ 58,225
Long-term notes payable secured by
mortgages on plant assets		 115,423 120,526 96,508
Common stock, $10 par value 162,500 162,500 162,500
Retained earnings 180,102 150,669 123,867
Total liabilities and equity $ 607,871 $ 524,027 $ 441,100


(1-a) Compute the current ratio for each of the three years.
(1-b) Did the current ratio improve or worsen over the three year period?
(2-a) Compute the acid-test ratio for each of the three years.
(2-b) Did the acid-test ratio improve or worsen over the three year period?

Complete this question by entering your answers in the tabs below.

  • Required 1A
  • Required 1B
  • Required 2A
  • Required 2B

Compute the current ratio for each of the three years.
Current Ratio
Choose Numerator: / Choose Denominator: = Current Ratio
/ = Current ratio
Current Yr: / = to 1
1 Yr Ago: / = to 1
2 Yrs Ago: / = to 1
  • Required 1A
  • Required 1B
  • Required 2A
  • Required 2B

  • Did the current ratio improve or worsen over the three year period?
    Current ratio

  • Compute the acid-test ratio for each of the three years.
    Acid-test ratio
    Choose Numerator: / Choose Denominator: = Acid-Test Ratio
    + + / = Acid-test ratio
    Current Yr: + + / = to 1
    1 Yr Ago: + + / = to 1
    2 Yrs Ago: + + / = to 1

Solutions

Expert Solution

Answer :

1 a. Current ratio :

Current asset = Cash + Accounts receivable + Merchandise inventory + Prepaid expenses

Current liability = Accounts payable

Numerator / Denominator = Current Ratio
Current assets / Current liabilty
Current Yr 286,922 / 149,846 = 1.91 to 1
1 Yr Ago 225,782 / 90,332 = 2.50 to 1
2 Yrs Ago 172,140 / 58,225 = 2.96 to 1

1.b Over the three years the current ratio has worsen, starting from 2 Yrs Ago it was 2.96 to 1 and at 1 Yr Ago it was to 2.50 to 1 and finally in current year it reached to 1.91 to 1.

2 a. Acid-Test Ratio :

Acid-Test Ratio = (Cash + Accounts receivable) / Current liability

Numerator / Denominator = Current Ratio
Cash + Accounts receivable / Current liabilty
Current Yr 140,528 / 149,846 = 0.94 to 1
1 Yr Ago 116,753 / 90,332 = 1.29 to 1
2 Yrs Ago 103,496 / 58,225 = 1.78 to 1

2.b Over the three years the Acid-Test Ratio has worsen this means that company has started losing its liquidity over the years.,starting from 2 Yrs Ago it was 1.78 to 1and at 1 Yr Ago it was to 1.29 to 1 and finally in current year it reached to 0.94 to 1.

ekkarill92 answered 1 year ago
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