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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Current position analysis

The following items are reported on a company’s balance sheet:

Cash $100,000
Marketable securities 50,000
Accounts receivable (net) 60,000
Inventory 70,000
Accounts payable 140,000

Determine (a) the current ratio and (b) the quick ratio. Round to one decimal place.

A)

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

To compute: Current ratio

Given info: Total current assets and current liabilities.

Explanation

Current Ratio: Current ratio is used to determine the relationship between current assets and current liabilities. Current ratio is determined by dividing current assets and current liabilities.

Formula:

Current ratio=Current assetsCurrentliabilities

The ideal current ratio is 2:1

Current assets are determined as follows:

Current assets = (Cash + Marketable securities&#

B)

To determine

Acid-Test Ratio: This ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio:

Acid Ratio=Quick assetsCurrentliabilities

Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors.

To calculate: Acid-test ratio

Given info: Current assets and current liabilities

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