Question

Q1. Hill Roy Corporation. has asked the accounts department to determine whether the company’s ability to pay its current liabilities and long-term debts improved or deteriorated during current year. To answer this question, compute the following ratios for current year and preceding year.

a. Current ratio
b. Quick (acid-test) ratio
c. Debt ratio
d. Times-interest-earned ratio
e. Prepare a small report based on your analysis of the following financial statement data in a written report format.

Current Year Preceding Year Balance Sheet: Cash... Short-term investments Net receivables Inventory Prepaid expenses. Total current assets Total current liabilities Income Statement: Net credit sales Cost of goods sold $ 17,000 11,000 64,000 77.000 16,000 $185.000 $111.000 $ 22,000 26,000 73,000 71.000 8,000 $200,000 $ 91,000 $654,000 327,000

All is given

Answer 1

Ratio	Current year	Previous year
Current ratio Current asset / Current liabilities	$185000/$111000 = 1.6667	$200000/$91000 = 2.1978
Quick ratio = current asset – inventories – prepaid expenses /current liabilities	$92000 / $111000 = 0.8288	$121000 / $91000 = 1.3296
Debt ratio = total liabilities / total assets	$111000 / $185000 = 0.6	$91000/$200000 = 0.455

· The above calculations current ratio is ideal for current year only. Previous year a high current ratio is reported. An ideal current ratio between 1.2 and 2. An ideal ratio means company have current assets to meet its current liabilities

· Quick ratio ideal value is 1. Below 1 means may not be able to pay current liabilities in short term. Higher than one is better to pay current liabilities in shorter period.

· A good debt ratio is between 0.3 and 0.6. in pure terms less than 0.4 is better. High ratio means company making high risk.

· There are no values available for calculation of Time interest earned ratio. The equation is

Income before interest and taxes / interest expenses. The ideal ratio is greater than 2.5 is better.