In: Accounting
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)
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.