BE24-8 Answer each of the questions in the following unrelated situations. (a) T
ID: 2376182 • Letter: B
Question
BE24-8
Answer each of the questions in the following unrelated situations.
(a) The current ratio of a company is 5:1 and its acid-test ratio is 1:1. If the inventories and prepaid items amount to $500,000, what is the amount of current liabilities?
$
(b) A company had an average inventory last year of $200,000 and its inventory turnover was 5. If sales volume and unit cost remain the same this year as last and inventory turnover is 8 this year, what will average inventory have to be during the current year?
$
(c) A company has current assets of $90,000 (of which $40,000 is inventory and prepaid items) and current liabilities of $40,000. Compute the following ratios. (Round answers to two decimal places eg 5.45)
What is the current ratio? :1
What is the acid-test ratio? :1
If the company borrows $15,000 cash from a bank on a 120-day loan, what will its current ratio be? :1
What will the acid-test ratio be? :1
(d) A company has current assets of $600,000 and current liabilities of $240,000. The board of directors declares a cash dividend of $180,000. (Round answers to two decimal places eg 5.45)
What is the current ratio after the declaration but before payment? :1
What is the current ratio after the payment of the dividend? :1
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Explanation / Answer
a) We know that current ratio is (CA)/(CL) and quick ratio is (CA-INV)/(CL). We know that CA/CL = 5.0x (CA-INV)/CL = 1.0x we can solve the first one to say CA = 5CL and we can plug this into the 2nd equation and algebraically solve to find CL = 50,000 b) If Inv = 200,000 and we know that inventory turnover ratio = COGS/INV. Our ratio is 5.0x and plug in INV and we find COGS is 1M. We then assume a new equation with COGS/INV = 8x. COGS is now 1m and inventory is 125,000 c) Current Ratio = (90)/(40) = 2.25 and Acid ratio is (90-40)/40 = 1.25 Because the company took out an accounts payable (120 day loan) and cash went up, CA and CL both went up by the same amount. This would cause both ratios to remain unchanged. d) CA = 600,000 and CL = 240,000 and the cash dividend will reduce cash, a current asset, by 180,000. Thus, Current Ratio = (600,000)/(240,000) = 2.5x After the dividend, our ratio is (600,000 - 180,000)/(240,000) = 1.75x Hope this helps.
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