Question

Simon Company’s year-end balance sheets follow.

At December 31	Current Yr				1 Yr Ago			2 Yrs Ago
Assets
Cash		$	33,341		$	37,062		$	40,584
Accounts receivable, net			93,789			68,870			53,587
Merchandise inventory			119,113			90,123			55,951
Prepaid expenses			10,737			9,929			4,466
Plant assets, net			297,036			271,616			243,412
Total assets		$	554,016		$	477,600		$	398,000
Liabilities and Equity
Accounts payable		$	137,950		$	83,136		$	51,485
Long-term notes payable secured by mortgages on plant assets			104,155			107,651			87,078
Common stock, $10 par value			162,500			162,500			162,500
Retained earnings			149,411			124,313			96,937
Total liabilities and equity		$	554,016		$	477,600		$	398,000

(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?

Answer 1

Answer:1-a:

Answer:1-b:

Yes over the three year period, the current ratio has almost improved.

But the current year ratio should not go down further otherwise company would not be able to pay its obligations when they become due.

A current ratio of 2 is considered to be idle. Current ratio of 3 indicates that company is not using its current assets efficiently, is not securing financing very well, or is not managing its working capital.

Answer:2-a:

Answer:2-b:

Yes over the three year period, the acid-test ratio has almost improved.

But the current year ratio should not go down further otherwise company would not be able to pay its obligations immediately.

A current ratio of 1 is considered to be idle.