Question

Swifty & Associates Inc. reports the following account balances for the year ending June 30, 2022:

Accounts payable		$22,000
Accounts receivable		37,000
Cash and cash equivalents		16,300
Goodwill		120,000
Inventory		93,000
Notes payable (due 2027)		120,000
Interest payable		3,600
Notes payable (due 2023)		12,000
Property, plant, and equipment		565,000
Accumulated depreciation		120,000
Prepaid insurance		10,300
Salaries and wages payable		14,600
Bonds payable		335,000

Compute the company’s (a) current ratio and (b) debt to assets ratio. (Round current ratio to 2 decimal places, e.g. 1.55:1 and debt to assets ratio to 0 decimal place, e.g. 55%.)

(a)		Current ratio			:1
(b)		Debt to assets ratio			%

Answer 1

Current ratio computes the ability of company to service its short term obligation of less than 1 year. It is a liquidity ratio and can measure short term financial strength of company. It is computed by dividing current assets/ current liabilities.

Accounts receivable	$                       37,000
Cash and cash equivalents	$                       16,300
Inventory	$                       93,000
Prepaid insurance	$                       10,300
Current Assets (A)	$                     156,600
Accounts payable	$                       22,000
Interest payable	$                          3,600
Notes payable due 2023	$                       12,000
salaries and wages payable	$                       14,600
Current Liabilities (B)	$                       52,200
Current Ratio ( A/B)	3 : 1

Debt to assets ratio measures the leverage of company, specifically financial leverage. It depicts the amount of assets financed by debts. It is computed by dividend total debt by total liabilities.

Current Assets	$                     156,600
Goodwill	$                     120,000
Property, plant and equipment         565,000 less accumulated depreciation        (120,000)	$                     445,000
Total Assets ( C)	$                     721,600
Current liabilities	$                       52,200
Notes payable due 2027	$                    120,000
bonds payable	$                     335,000
Total debt (D)	$                     507,200
Debt to assets	70%

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