Exercise 13-7 Liquidity analysis LO P3 Simon Company\'s year-end balance sheets

Question

Exercise 13-7 Liquidity analysis LO P3 Simon Company's year-end balance sheets follow Assets Cash Accounts receivable, net Merchandise inventory Prepaid expenses Plant assets, net Total assets $ 33,386 4,208 S 41,896 96,763 7,36454,755 8,903 4,517 3.671 279,e58 258,929 s571,583 492,744 419,8e 92,983 11,1868,141 Liabilities and Equity Accounts payable Long-term notes payable secured by 5139,478 83,274$ 53,64 108,532 i13,331 2,59 sortgages on plant assets Common stock, s1e par value Retained earningS 62,588162,58 162,5 61,073 133,639 110,252 571,583 492,744$ 419,ee Total liabilities and equsty 1. Compute the current ratio for the year ended 2017 2016, and 2015 2. Compute the acid-test ratio for the year ended 2017, 2016, and 2015

Explanation / Answer

1. Computation of Current ratio:

**Current ratio = Current assets ÷ Current liabilities

Current assets = Cash + Accounts receivable, net + Merchandise inventory + Prepaid expenses

Current liabilities = Accounts payable

$267,912

2. Computation of Acid test ratio or Quick ratio:

***Acid test ratio = Quick assets or Highly liquid assets ÷ Current liabilities

Quick assets or Numerator = Cash + Accounts receivable

Current liabilities or Denominator = Accounts payable

Note: Inventory and prepaid expenses shall not be considered as quick assets as it is difficult to convert them into cash.

Current assets (Numerator) Current liabilities (Denominator) Current ratio 2017

$267,912

$139,478 1.92:1 2016 $213,694 $83,274 2.57:1 2015 $160,071 $53,649 2.98:1

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