2. The Robinson Company has the following current assets and current liabilities

Question

2. The Robinson Company has the following current assets and current liabilities for these two years: 2010 2011 Cash and marketable securities $ 50,000 $ 50,000 Accounts receivable 300,000 350,000 Inventories 350,000 500,000 Total current assets $700,000 $900,000 Accounts payable $200,000 $250,000 Bank loan 0 150,000 Accruals 150,000 200,000 Total current liabilities $350,000 $600,000 If sales in 2010 were $1.2 million, sales in 2011 were $1.3 million, and cost of goods sold was 70 percent of sales, how long were Robinson

Explanation / Answer

Current Ratio is calculated as: Current Assets / Current Liabilities Here it is: 2011 $700,000 / $350,000 = 2 2012 $900,000 / $600,000 = 1.5 Higher is better, so a drop from 2.0 to 1.5 indicates a degradation of the company's liquidity Quick Ratio is measured as: (Current Assets - Inventory) / Current Liabilities Here it is: 2011 ($700,000 - $350,000) / $350,000 = 1.0 2012 ($900,000 - $500,000) / $600,000 = 0.667 Again, the ratio has declined in 2012 indicating a worsening of the company's liquidity.

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