Chapter 13, Problem 3PSA

To determine

Current Ratio:

Current ratio is the ratio which is used to measure a company’s liquidity and it considers current assets and current liabilities.

Acid Test Ratio:

Acid test ratio is a ratio which is measures the ability of a company to pay off its current obligations out of near cash or quick assets.

To prepare: Table showing (1) current ratio, (2) acid-test ratio and (3) working capital after each transaction.

Explanation of Solution

Table presenting current ratio, acid-test ratio and working capital transaction wise:

Transaction	Current Assets (CA) ($)	Quick Assets (CL) ($)	Current Liabilities ($)	Current Ratio (1)	Acid-Test Ratio (2)	Working Capital ($) $$\left(\text{CA}-\text{CL}\right)$$ (3)
Beginning	700,000	308,000	280,000	2.50	1.10	420,000
May 2	50,000		50,000
Balance	750,000	308,000	330,000	2.27	0.93	420,000
May 8	55,000
Balance	805,000	308000	330,000	2.44	0.93	475,000
May 10	20,000
Balance	825,000	308,000	330,000	2.5	0.93	495,000
May 15	-22,000		-22,000
Balance	803,000	308,000	308,000	2.61	1	495,000
May 17	-5,000
Balance	798,000	308,000	308,000	2.19	1	490,000
May 22
Balance	798,000	308,000	308,000	2.19	1	490,000
May 26	-50,000
Balance	748,000	308,000	308,000	2.43	1	440,000
May 27	100,000		110,000
Balance	848,000	308,000	418,000	2.03	0.74	430,000
May 28	80,000
Balance	928,000	308,000	418,000	2.22	0.74	510,000
May 29	-185000
Balance	743,000	308,000	418,000	1.80	0.74	325,000

Table(1)

Working notes:

Formula to calculate current ratio,

$\text{Current}\text{ratio}=\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}$ …..(1)

Calculation of current liabilities from current ratio,

$\begin{array}{c}\text{2}\text{.50}=\frac{\$700,000}{\text{Current}\text{Liabilities}}\\ \text{Curent}\text{liabilities}=\frac{\$700,000}{\text{2}\text{.50}}\\ \text{Curent}\text{liabilities}=\$280,000\end{array}$

Formula to calculate acid-test ratio,

$\text{Acid}\text{test}\text{ratio}=\frac{\text{Quick}\text{Assets}}{\text{Current}\text{Liabilities}}$ …..(2)

Calculation of quick assets from acid test ratio,

$\begin{array}{c}1.10=\frac{\text{Quick}\text{assets}}{\$280,000}\\ \text{Quick}\text{assets}=\$280,000\times 1.10\\ \text{Quick}\text{assets}=\$308,000\end{array}$

Calculation of current ratio at the end of May 2 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$750,000}{\$330,000}\\ =2.27\end{array}$

Calculation of acid-test ratio at the end of May 2 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$330,000}\\ =0.93\end{array}$

Calculation of current ratio at the end of May 8 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$805,000}{\$330,000}\\ =2.44\end{array}$

Calculation of acid-test ratio at the end of May 8 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$330,000}\\ =0.93\end{array}$

Calculation of current ratio at the end of May 10 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$825,000}{\$330,000}\\ =2.5\end{array}$

Calculation of acid-test ratio at the end of May 10 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$330,000}\\ =0.93\end{array}$

Calculation of current ratio at the end of May 15 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$803,000}{\$308,000}\\ =2.61\end{array}$

Calculation of acid-test ratio at the end of May 15 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$308,000}\\ =1\end{array}$

Calculation of current ratio at the end of May 17 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$798,000}{\$308,000}\\ =2.19\end{array}$

Calculation of acid-test ratio at the end of May 17 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$308,000}\\ =1\end{array}$

Calculation of current ratio at the end of May 26 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$748,000}{\$308,000}\\ =2.43\end{array}$

Calculation of acid-test ratio at the end of May 26 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$308,000}\\ =1\end{array}$

Calculation of current ratio at the end of May 27 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$848,000}{\$418,000}\\ =2.03\end{array}$

Calculation of acid-test ratio at the end of May 27 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$418,000}\\ =0.74\end{array}$

Calculation of current ratio at the end of May 28 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$928,000}{\$418,000}\\ =2.22\end{array}$

Calculation of acid-test ratio at the end of May 28 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$418,000}\\ =0.74\end{array}$

Calculation of current ratio at the end of May 29 by using equation (1),

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$743,000}{\$418,000}\\ =1.80\end{array}$

Calculation of acid-test ratio at the end of May 29 by using equation (2),

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$308,000}{\$418,000}\\ =0.74\end{array}$

Hence, at the end of May 29, current ratio is 1.80, acid-test ratio is 0.74 and working capital is $325,000.