Brief Exercise 24-8 Answer each of the questions in the following unrelated situ

Question

Brief Exercise 24-8 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 $486,000, what is the amount of current liabilities? Current Liabilities (b) A company had an average inventory last year of $205,000 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? (Round answer to O decimal places, e.g. 125.) Average Inventory (e) A company has current assets of $84,000 (of which $41,000 is inventory and prepaid items) and current liabilities of $41,000. What is the current ratio? What is the acid-test ratio? tf the company borrows % 14,000 cash from a bank on a 120-da decimal places, e.g. 2.50 y loan, what will its current ratio be? What will the acid-test ratio be? (Round answers to 2 Current Ratio Acid Test Ratio New Current Ratio New Acid Test Ratio (d) A company has current assets of $624,000 and current liabilities of $260,000. The board of directors declares a cash dividend of $184,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend? (Round answers to 2 decimal places, e.g. 2.50.) Current ratio after the declaration but before payment

Explanation / Answer

Answer a.

Current Ratio = 5 : 1
Acid-test Ratio = 1 : 1

Current Ratio = Current Assets / Current Liabilities
5 = Current Assets / Current Liabilities
Current Assets = 5 * Current Liabilities

Acid-test Ratio = (Current Assets - Inventories and Prepaid Items) / Current Liabilities
1 = (Current Assets - Inventories and Prepaid Items) / Current Liabilities
Current Assets - Inventories and Prepaid Items = Current Liabilities
5 * Current Liabilities - Inventories and Prepaid Items = Current Liabilities
4 * Current Liabilities = Inventories and Prepaid Items
4 * Current Liabilities = $486,000
Current Liabilities = $121,500

Answer b.

Last year:

Inventory Turnover = Sales / Average Inventory
5 = Sales / $205,000
Sales = $1,025,000

This year:

Inventory Turnover = Sales / Average Inventory
8 = $1,025,000 / Average Inventory
Average Inventory = $128,125

Answer c.

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $84,000 / $41,000
Current Ratio = 2.05 : 1

Quick Ratio = (Current Assets - Inventory and Prepaid Items) / Current Liabilities
Quick Ratio = ($84,000 - $41,000) / $41,000
Quick Ratio = 1.05 : 1

New Current Ratio = (Current Assets + Cash received from loan) / (Current Liabilities + Short-term Loan)
New Current Ratio = ($84,000 + $14,000) / ($41,000 + $14,000)
New Current Ratio = 1.78 : 1

New Quick Ratio = (Current Assets + Cash received from loan - Inventory and Prepaid Items) / (Current Liabilities + Short-term Loan)
New Quick Ratio = ($84,000 + $14,000 - $41,000) / ($41,000 + $14,000)
New Quick Ratio = 1.04 : 1

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