Question

Part II: The following balance sheet (statement of financial position) is presented for Cyber Security Corporation. Cyber Security Corporation Statement of Financial Position At December 31, 2020 Liabilities Current $100 Accounts Payable 200 Wages Payable 500 Dividends Payable Assets Current Cash Accounts Receivable Merchandise Inventory Prepared Expenses $300 50 400 850 Non-current Property, plant & equipment (net) Non-current Loan Payable 1,000 800 1,200 Shareholders' Equity Common Shares Retained Eamings Total Shareholder's Equity 500 150 650 Total Assets $1,850 Total Liability and Equity $1,850 Requirements: Show all work. 1. Calculate current ratio, acid-test ratio, and debt to shareholder's equity ratio. 2. Discuss the meaning of each ratio result. (What do these ratios mean for Cyber Security?)

Answer 1

Ans. 1 a	Current ratio   =   Total current assets / Total current liabilities
		$850 / $400
		2.125 : 1
Ans. 1 b	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
		($850 - $500 - $50) / $400
		$300 / $400
		0.75 : 1
Ans. 1 c	Debt to stockholder's equity ratio   =   Total liabilities / Total stockholder's equity
		$1,200 / $650
		1.85 : 1
Ans. 2	The ideal current ratio is 2 : 1. The company's current ratio is 2.125 : 1 , which shows sound position
	for the company.
	The ideal acid test ratio is 1 : 1 . The company's acid test ratio is 0.75 : 1 which shows the low liquidity
	position (risky position) for the coompany.
	The ideal debt to equity ratio is 1.5 : 1 . The company's debt to equity ratio is 1.85 : 1 that means the company
	is using more debts for financing than required in the comparison of total stockholder's equity. The higher debt
	to equity ratio is risky for the company.