Question

The financial statements for Tyler​ Toys, Inc.  Calculate the current​ ratio, quick​ ratio, and cash ratio for Tyler Toys for 2013 and 2014. Should any of these ratios or the change in a ratio warrant concern for the managers of Tyler Toys or the​ shareholders?

Tyler Toys, Inc.
Income Statement for Years Ending December 31, 2013 and 2014
	2014	2013
Revenue	$14,147,946	$13,566,699
Cost of goods sold	$-8,447,605	$-8,132,285
Selling, general, and administrative expenses	$-997,233	$-980,532
Depreciation	$-1,497,455	$-1,472,391
EBIT	$3,205,653	$2,981,491
Interest expense	$-376,963	$-355,460
Taxes	$-1,074,902	$-997,892
Net income	$1,753,788	$1,628,139

Tyler Toys, Inc.
Balance Sheet as of December 31, 2013 and 2014
ASSETS	2014	2013	LIABILITIES	2014	2013
Current assets			Current liabilities
Cash	$191,815	$186,115	Accounts payable	$1,546,821	$1,456,760
Investments	$180,008	$120,687	Short-term debt	$311,761	$332,580
Accounts receivable	$667,516	$631,416	Total current liabilities	$1,858,582	$1,789,340
Inventory	$587,088	$564,107	Long-term liabilities
Total current assets	$1,626,427	$1,502,325	Debt	$7,286,898	$6,603,245
Long-term assets			Other liabilities	$1,462,734	$1,346,663
Investments	$3,053,951	$2,827,666	Total liabilities	$10,608,214	$9,739,248
Plant, property, and equipment	$8,497,943	$8,481,885	OWNERS’ EQUITY
Goodwill	$347,663	$346,004	Common stock	$1,458,339	$1,454,189
Intangible assets	$1,157,792	$957,580	Retained earnings	$2,617,223	$2,922,023
			Total owners’ equity	$4,075,562	$4,376,212
			TOTAL LIABILITIES
TOTAL ASSETS	$14,683,776	$14,115,460	AND OWNERS’ EQUITY	$14,683,776	$14,115,460

                                                          

What is the current ratio for​ 2014?

Answer 1

1. Current ratio = Current assets / Current liabilities

Value of current assets and current liabilities can be take from the balance sheet.

For 2014:

Current assets = $1626427, Current liabilities = $1858582

Current ratio = $1626427 / $1858582 = 0.8750

For 2013:

Current assets = $1502325, Current liabilities = $1789340

Current ratio = $1502325 / $1789340 = 0.8395

2. Quick ratio = (Current assets - inventory) / Current liabilities

Value of current assets, inventory and current liabilities can be take from the balance sheet.

For 2014:

Current assets = $1626427, Inventory = $587088, Current liabilities = $1858582

Quick ratio = ($1626427 - $587088) / $1858582 = $1039339 / $1858582 = 0.5592

For 2013:

Current assets = $1502325, Inventory = $564107, Current liabilities = $1789340

Quick ratio = ($1502325 - $564107) / $1789340 = $938218 / $1789340 = 0.52433

3. Cash ratio = Cash / Current liabilities

Value of cash and current liabilities can be take from the balance sheet.

For 2014:

Cash = $191815, Current liabilities = $1858582

Quick ratio = $191815/ $1858582 = $1039339 / $1858582 = 0.1032

For 2013:

Cash = $186115, Current liabilities = $1789340

Cash ratio = $186115 / $1789340 = 0.1040

Current ratio is very low and is a cause of concern to the management. Ideally it should have been more than or equal to 2, but it is far less than 2 for both the years. It means that Tyler Toys have very less amount of current assets available to pay ts current liabilities or short term liabilities, when they become due.

Quick ratio is also very low and is a cause of concern to the management. Ideally it should have been more than or equal to 1, but it is less than 1 for both the years. It means that Tyler Toys have very less amount of assets that can be converted into cash quickly, available to pay its current liabilities or short term liabilities, when they become due.

Cash ratio is also very low and is a cause of concern to the management. Like quick ratio,ideally it should have been more than or equal to 1, but it is far less than 1 for both the years. It means that Tyler Toys have very less amount of cash available to pay its current liabilities or short term liabilities, when they become due.