Question

Ritter Company has a current ratio of 3.00 on December 31. On that date the company's current assets are as follows:

Working Capital and Short-Term Liquidity Ratios 

Ritter Company has a current ratio of 3.00 on December 31. On that date the company's current assets are as follows: 

Cash$32,000
Short-term investments49,300
Accounts receivable (net)170,000
Inventory200,000
Prepaid expenses11,600
Current assets$462,900


Ritter Company's current liabilities at the beginning of the year were $150,000 and during the year its operating activities provided a cash flow of $60,000.

 a. What are the firm's current liabilities on December 31?

 b. What is the firm's working capital on December 31?

 c. What is the quick ratio on December 31? 

 d. What is the Ritter's operating-cash-flow-to-current-liabilities ratio? 

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Ans:

a) Current ratio = current assets / current liabilities

Current liabilities = Current assets / current ratio

= $462,900/3

= $154,300

Current liabilities at the end of the year Dec 31= $154,300

(As current assets are of year end Dec31)

Firm's current liabilities on Dec 31 $154,300

b) Working capital = Current assets - Current liabilities

= $462,900 - $154,300

= $308,600

Firm's working capital on Dec 31 $308,600

c) Quick ratio:

= (Current assets - Prepaid expenses - inventory)/current liabilities

= ($462,900 - $11,600 - $200,000) / $154,300

= ($251,300) / $154,300

= 1.628

Firm's quick ratio on Dec 31 1.63

d) Operating cash flow to current liabilities ratio:

= Operating cash flows / current liabilities

= $60,000/$154,300

= 0.3888

Ritter's operating cash flow to current liabilities ratio 3.89

If any doubts or queries please comment and clarify I'll explain ASAP

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