Chapter 13, Problem 3PSB

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 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 for K Company.

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	300,000	168,000	120,000	2.5	2.4	180,000
June 1	+75,000 -120,000
Balance	345,000	168,000	120,000	2.88	2.4	225,000
June 3	+88,000 -88000
Balance	345,000	168,000	120,000	2.88	1.4	225,000
June 5	150,000		150,000
Balance	495,000	168,000	270,000	1.83	0.62	225,000
June 7	100,000		110,000
Balance	595,000	168,000	380,000	1.57	0.44	215,000
June 10	120,000
Balance	715,000	168,000	380,000	1.88	0.44	335,000
June 12	-275,000
Balance	440,000	168,000	380,000	1.56	0.44	60,000
June 15
Balance	440,000	168,000	380,000	1.56	0.44	60,000
June 19	-5000
Balance	435,000	168,000	380,000	1.14	0.44	55,000
June 22	-12,000 +15000		-12,000
Balance	438,000	168,000	368,000	1.14	0.46	55,000
June 30	-80000
Balance	358,000	168,000	368,000	0.97	0.46	(10,000)

Conclusion

Hence, at the end of June 29 (1) current ratio is 0.97, (2) acid-test ratio is 0.46 and (3) working capital is $(10,000).

Working notes:

Formula to calculate current ratio is,

$\text{Current}\text{ratio}=\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}$

Calculation of current liabilities from current ratio,

$\begin{array}{c}\text{2}\text{.5}=\frac{\$300,000}{\text{Current}\text{liabilities}}\\ \text{Curent}\text{liabilities}=\frac{\$300,000}{\text{2}\text{.5}}\\ \text{Curent}\text{liabilities}=\$120,000\end{array}$

Formula to calculate acid-test ratio is,

$\text{Acid}\text{test}\text{ratio}=\frac{\text{Quick}\text{assets}}{\text{Current}\text{liabilities}}$

Calculation of quick assets from acid test ratio,

$\begin{array}{c}1.4=\frac{\text{Quick}\text{assets}}{\$120,000}\\ \text{Quick}\text{assets}=\$120,000\times 1.4\\ \text{Quick}\text{assets}=\$168,000\end{array}$

Calculation of current ratio at the end of June 1,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$345,000}{\$120,000}\\ =2.88\end{array}$

Calculation of acid-test ratio at the end of June 1,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$120,000}\\ =2.4\end{array}$

Calculation of current ratio at the end of June 3,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$345,000}{\$120,000}\\ =2.88\end{array}$

Calculation of acid-test ratio at the end of June 3,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$120,000}\\ =2.4\end{array}$

Calculation of current ratio at the end of June 5,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\begin{array}{c}495,000\end{array}}{\$270,000}\\ =1.83\end{array}$

Calculation of acid-test ratio at the end of June 5,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$270,000}\\ =0.62\end{array}$

Calculation of current ratio at the end of June 7,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$595,000}{\$380,000}\\ =1.57\end{array}$

Calculation of acid-test ratio at the end of June 7,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$380,000}\\ =0.44\end{array}$

Calculation of current ratio at the end of June 10,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$715,000}{\$380,000}\\ =1.88\end{array}$

Calculation of acid-test ratio at the end of June 10,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$380,000}\\ =0.44\end{array}$

Calculation of current ratio at the end of June 12,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$440,000}{\$380,000}\\ =1.56\end{array}$

Calculation of acid-test ratio at the end of June 12,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$380,000}\\ =0.44\end{array}$

Calculation of current ratio at the end of June 15,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$440,000}{\$380,000}\\ =1.56\end{array}$

Calculation of acid-test ratio at the end of June 15,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$380,000}\\ =0.44\end{array}$

Calculation of current ratio at the end of June 19,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$435,000}{\$380,000}\\ =1.14\end{array}$

Calculation of acid-test ratio at the end of June 19,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$380,000}\\ =0.44\end{array}$

Calculation of current ratio at the end of June 22,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$423,000}{\$368,000}\\ =1.14\end{array}$

Calculation of acid-test ratio at the end of June 22,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$368,000}\\ =0.46\end{array}$

Calculation of current ratio at the end of June 30,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$358,000}{\$368,000}\\ =0.97\end{array}$

Calculation of acid-test ratio at the end of June 30,

$\begin{array}{c}\text{Acid-test}\text{ratio}=\frac{\$168,000}{\$368,000}\\ =0.46\end{array}$