Question

The current asset section of Stibbe Pharmaceutical Company's balance sheet included cash of $22,000 and accounts receivable of $42,000. The only other current asset is inventory. The company's current ratio is 2.5 and its acid-test ratio is 2.0. Determine the ending balance in inventory and total current liabilities. Inventory Current liabilities

Answer 1

Ans.

Inventory. = $16,000

Current liabilities. = $32,000

*Working notes:

*Calculation for total current liabilities:

Inventory is a non liquid asset so it is not included in the calculation of acid test ratio.

Acid test ratio = (Cash + Accounts receivable) / Total current liabilities

2.0 = ($22,000 + $42,000) / Total current liabilities

2.0 = $64,000 / Total current liabilities

Total current liabilities = $64,000 / 2.0

Total current liabilities = $32,000

*Calculation for inventory:

Current ratio = Current assets / Current liabilities

2.5 = Current assets / $32,000

Current assets = $32,000 * 2.5

Current assets = $80,000

*Current assets is the sum of cash, accounts receivable and inventory. So the inventory amount will be remaining amount after deducting cash and accounts receivable from total current assets.

Inventory = Total current assets - Cash - Accounts receivable

Inventory = $80,000 - $22,000 - $42,000

Inventory = $16,000