HALLBROOK INDUSTRIES, INC. Balance Sheet December 31, 2021 ($ in thousands) Assets Cash Short-term investments Accounts...

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HALLBROOK INDUSTRIES, INC. Balance Sheet December 31, 2021 ($ in thousands) Assets Cash Short-term investments Accounts recei

Required: 1. Calculate the current ratio. (Round your answer to 2 decimal places.) 2. Calculate the acid-test ratio. (Round y

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Answer 1

Answer #1

Solution:

1) Current Ratio: Current assets / Current Liabilities

: 1300 / 530

: 2.45 Times

Note: * Current assets includes cash, short term investments(easily convertable into cash) , inventory and account receivables. (330+280+330+360=1300)

* Meaning of 2.45 times - The company has 2.45 times more current assets than liabilities to cover its debts which is a very good indication.

2) Acid - Test Ratio: (Cash + Short term investments + Account receivables) / Current Liabilities

: (330 + 280 + 330) / 530

: 940 / 530

: 1.773 Times

Note: * The Acid test ratio of Hallbook Industries Inc is 1.773 it means it has lot of liquid assets and high liquidity.

* This ratio is also known as Quick ratio.

3) Debt to Equity Ratio: Total Debt / Share holder's equity

: Long term Liabilities / (Paid in capital + Retained earnings)

: 480 / (1400 + 1190)

: 480 / 2590

: 0.18 Times

Note: * Generally ideal deabt equity ratio is less than 2. Since the Company's ratio is 0.18 times it is ideal.

4) Times Interest earning ratio: Earnings Before Interest and tax / Total interest expenses

: (Net income + Income Tax expense + Interest expense) / Interest expense

: (290+120+50) / 50

: 460 / 50

: 9.2 Times

Note: * Ideal interest earning ratio is 2.5 times. The higer the interest earned ratio it is more favourable because investors are in less risk.

Summary:

Sl No.	Particulars	Ratio
1	Current Ratio	2.45 Times
2	Acit-test ratio	1.773 Times
3	Debt to Equity Ratio	0.18 Times
4	Times Interest earning ratio	9.2 Times

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