Requirement – 1
To calculate: The
Requirement – 1
Explanation of Solution
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:
The current ratio of Company B for the past two year is as follows:
In 2015:
Here,
Current assets = $324,589 thousand
Current liabilities = $122,271 thousand
In 2014:
Current assets = $342,137 thousand
Current liabilities = $132,381 thousand
Therefore, the current ratio in the most recent year (2015) is weakened.
Requirement – 2
To calculate: The acid test ratio for the past two year, and discuss whether the acid test ratio improve or weaken in the most recent year.
Requirement – 2
Explanation of Solution
Acid-test Ratio:
It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets that are current assets except inventory and prepaid expenses.
Formula:
The acid test ratio of Company B for the past two year is as follows:
In 2015:
Here,
Cash= $133,708 thousand
Short-term investment= $25,857 thousand
Current liabilities = $122,271 thousand
In 2014:
Here,
Cash= $164,868 thousand
Accounts receivable = $4,318 thousand
Short-term investment= $20,197 thousand
Current liabilities = $123,381 thousand
Therefore, the acid test ratio in the most recent year (2015) is weakened.
Requirement – 3
The manner in which the current ratio and acid test ratio will change, if Company B purchased $50 million of inventory by debiting inventory and crediting accounts payable.
Requirement – 3
Explanation of Solution
Calculate current ratio if company purchased $50 million of inventory by debiting inventory and crediting accounts payable.
If the company purchases $50 million of inventory, the current assets (inventory) and the current liabilities (accounts payable) both increase by $50 million. Thus, this transaction decreases the current ratio. The calculation is as given below:
Calculate acid-test ratio if company purchased $50 million of inventory by debiting inventory and crediting accounts payable.
If the company purchases $50 million of inventory, the current liabilities increase by $50 million, but the quick assets remain same. Hence, this transaction decreases the acid-test ratio. The calculation is as given below:
Therefore, both current and acid test ratio is decreased.
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Chapter 8 Solutions
FIN ACCT AC W/EBOOK CUSTOM PRICING
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