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In: Accounting

Keisy’s Topical Kids Inc. had the following information for 2019 and 2020: Account 12/31/2020 12/31/2019 Cash...

Keisy’s Topical Kids Inc. had the following information for 2019 and 2020:

Account	12/31/2020	12/31/2019
Cash and Cash Equivalents	$12,000	$16,000
Short-Term Investments	11,000	5,000
Current Receivables, net	23,000	32,000
Inventory	26,000	16,000
Prepaid Insurance	2,000	3,000
Salaries Payable	17,000	28,000
Short-Term Notes Payable	12,000	16,000
Credit Sales for year	320,000	210,000

Answer the following questions:

Compute the Current Ratio for 2019 and 2020.
What does the results of a current ratio measure?
Did the Current Ratio improve and is Keisy’s Topical Kids Inc. in good financial condition?
Are there weaknesses in using a current ratio?

Expert Solution

(1)

Current assets = cash & cash equivalents + short term investments + current receivables, net + inventory + prepaid insurance

current liabilities = salaries payable + short term notes payable

for 2019,

current assets = $16000 + $5000 + $32000 + $16000 + $3000 = $72000

current liabilities = $28000 + $16000 = $44000

therefore,

current ratio = $72000/$44000 = 1.64 times

for 2020,

current assets = $12000 + $11000 + $23000 + $26000 + $2000 = $74000

current liabilities = $17000 + $12000 = $29000

therefore,

current ratio = $74000/$29000 = 2.55 times

(2)

result of current ratio measures by what times the amount of current assets is as compared to current liability.

(3)

yes, the current ratio has improved as it has gone up to 2.55 from 1.64

yes, Keisy’s Topical Kids Inc. is in good financial condition which is evident from the current ratios.

(4)

Yes, the primary weakness of using current ratio is that it is not adequate indicator of the liquidity position of a company.

ekkarill92 answered 1 year ago

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