Question

Exercise 13-7 Analyzing liquidity LO P3 Simon Company's year-end balance sheets follow. Current Yr 1 Yr Ago 2 Yrs Ago At December 31 Assets Cash Accounts receivable, net Merchandise inventory Prepaid expenses Plant assets, net Total assets Liabilities and Equity Accounts payable Long-term notes payable secured by mortgages on plant assets Common stock, $10 par value Retained earnings Total liabilities and equity $ 29,604 86,667 105,699 9,437 275,420 $ 506,827 $ 35,653 61,780 79,214 9,267 251,006 $ 436,920 $ 37,127 48,061 51,702 3,925 223,285 $ 364,100 $ 123,676 $ 76,055 $ 49,503 97,189 162,500 123,462 $ 506,827 99,487 82,075 162,500 162,500 98,878 70,022 $ 436,920 $ 364,100 (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

1.A
	Current Assets	Current Yr	1 Yr ago	2 Yrs ago
	Cash	$29,604	$35,653	$37,127
	Accounts receivable	$86,667	$61,780	$48,061
	Inventory	$1,05,699	$79,214	$51,702
	prepaid expense	$9,437	$9,267	$3,925
	Total Current Assets (A)	$2,31,407	$1,85,914	$1,40,815
	Current Liabilities
	Accounts payable	$1,23,676	$76,055	$49,503
	Total Current Liabilities (B)	$1,23,676	$76,055	$49,503
	Current Ratio (A)/(B)	1.87	2.44	2.84
1.B	Current ratio has worsen over time.
2.A	Current Assets	Current Yr	1 Yr ago	2 Yrs ago
	Cash	$29,604	$35,653	$37,127
	Accounts receivable	$86,667	$61,780	$48,061
	prepaid expense	$9,437	$9,267	$3,925
	Total Current Assets (A)	$1,25,708	$1,06,700	$89,113
	Current Liabilities
	Accounts payable	$1,23,676	$76,055	$49,503
	Total Current Liabilities (B)	$1,23,676	$76,055	$49,503
	Quick Ratio (A)/(B)	1.02	1.40	1.80
	Inventory is not included for Quick ratio
2.B	Quick ratio has worsen over time.