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9 February, 12:09

A company has current assets of $97,000 (of which $37,000 is inventory and prepaid items) and current liabilities of $37,000. What is the current ratio? What is the acid-test ratio? If the company borrows $17,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the acid-test ratio be? (Round an

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  1. 9 February, 14:09
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    (a) 2.62; 1.62

    (b) 1.80; 1.11

    Explanation:

    Given that,

    Current assets = $97,000 (of which Inventory and prepaid items = $37,000)

    Current liabilities = $37,000

    Current ratio = Current assets : Current liabilities

    = $97,000 : $37,000

    = 2.62

    Acid test ratio:

    = (Current assets - Inventory and prepaid expense) : Current liabilities

    = ($97,000 - $37,000) : $37,000

    = $60,000 : $37,000

    = 1.62

    If the company borrows $17,000 cash from a bank on a 120-day loan.

    Current liabilities = Old current liabilities + New current liabilities

    = $37,000 + $17,000

    = $54,000

    Current ratio = Current assets : Current liabilities

    = $97,000 : $54,000

    = 1.80

    Acid test ratio:

    = (Current assets - Inventory and prepaid expense) : Current liabilities

    = ($97,000 - $37,000) : $54,000

    = $60,000 : $54,000

    = 1.11
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