Question

The current ratio of a company is 5:1 and its acid-test ratio is 1:1. If the inventories and prepaid items amount to $531,000, what is the amount of current liabilities?

Answer 1

Given Information Current Ratio 51 Acid Test ratio 1:1 Inventories and Prepaid items - $531000 Current Ratio Current Assets/Current liabilities Here Inventory and Prepaid items are current assets 5/1-531000/current liabities Current liabities $ 106200

Given Information Average Inventory $180000 Inventory Turnover 6 Inventory Turnover ratio Cost of goods sold/Average Inventory Substitute values in above formula 6 Cost of goods sold/180000 Cost of goods sold 180000*6 Cost of goods sold $1080000 If sales volume and unit cost remains same as last year means Cost of goods sold also remains same as last year Inventory Turnover ratio 8 Inventory Turnover ratio Cost of goods sold/Average Inventory Substitute values in above formula 8 1080000/Average Inventory Average Inventory1080000/8 Average Inventory $135,000

C) Given Information Current assets $86000 Inventory and prepaid items Current liabilities $41000 $41000 Current Ratio Current Assets/Current liabilities Acid test ratio- Current Assets- Inventory and prepaid items Current liabilities Current Ratio 86000/41000 -86000-41000 1000 Current Ratio2.09: 1 Acid test ratio 1.09:1 If Company borrow $17000 from a bank on 120 day loan it is classified as short term loan so current liability increase by $17000 and cash increases so current asset increases by $17000 New Current Assets 86000+17000 New Current liabilities 41000+17000 New Acid test ratio 103000- 41000/58000 1.06 103000 New Acid Test Ratio 1.06 : 1 -58000 New Current ratio 103000/58000 New Current ratio:1.77:1

(d)Given Information Current Assets 578000 Current liabilities $229000 Board of directors declare cash dividend of $ 167000 Clculation of Current ratio after declaration of dividend but before payment If dividend declared but payment not yet made it is proposed dividend and it is considered as current liability Current Ratio Current Assets/Current liabilities 578000/229000+167000 Current ratio after declaration of dividend before payment 1.45 1 Calculation of current ratio after payment of dividend If Cash dividend paid then cash decreases it means current liabilities decreases Current Ratio Current Assets/Current liabilities 578000 -167000/229000 Current Ratio after the payment of dividend -1.79:1