Question

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:

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

Solutions

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.


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