Complete the comparing across time analysis of Company S’s comparative financial statement.

Question

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Answer 1

Question

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Chapter 13, Problem 5AP

1)

To determine

Complete the comparing across time analysis of Company S’s comparative financial statement.

1)

Expert Solution

Explanation of Solution

Comparison of across time analysis of financial statements: In this method of analysis of financial statements, the amount of each current year item of the financial statement is compared with the previous year amount. The amount of each item increased or decreased in the current financial statements, and its respective percentage can be computed by taking the earlier statement as the base.

Comparing across time analysis of financial statements of Corporation S:

Corporation S
Comparative Income Statement
Year Ended Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Sales revenue	$ 453,000	$ 447,000	$6,000	1.34%
Cost of goods sold	($ 250,000)	($ 241,000)	($9,000)	3.73%
Gross profit	$ 203,000	$ 206,000	($3,000)	-1.46%
Operating expenses (Including interest on bonds)	($ 167,000)	($ 168,000)	($1,000)	-0.60%
Pre-tax Income	$ 36,000	$ 38,000	($2,000)	-5.26%
Income tax expense	($ 10,800)	($ 11,400)	($600)	-5.26%
Net income	$ 25,200	$ 26,600	($1,400)	-5.26%

Table (1)

Corporation S
Comparative Balance Sheet
As on Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Cash	$ 6,800	$ 3,900	$2,900	74.36%
Accounts receivable (net)	$ 42,000	$ 29,000	$13,000	44.83%
Merchandise Inventory	$ 25,000	$ 18,000	$7,000	38.89%
Prepaid expenses	$ 200	$ 100	$100	100.00%
Property and equipment (net)	$ 130,000	$ 120,000	$10,000	8.33%
Total assets	$ 204,000	$ 171,000	$33,000	19.30%
Accounts payable	$ 17,000	$ 18,000	($1,000)	-5.56%
Income taxes payable	$ 1,000	$ 1,000	$0	0.00%
Bonds payable (Interest rate: 10%)	$ 70,000	$ 50,000	$20,000	40.00%
Common stock($10 par value)	$ 100,000	$ 100,000	$0	0.00%
Retained earnings	$ 16,000	$ 2,000	$14,000	700.00%
Total liabilities and equity	$ 204,000	$ 171,000	$33,000	19.30%

Table (2)

2)

To determine

Determine the amount of current ratio changed from Year 1 to Year 2.

2)

Expert Solution

Explanation of Solution

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Current ratio = Current AssetsCurrent Liabilities

Current ratio for Year 2:

Current ratio = Current AssetsCurrent Liabilities= ($6,800 + $42,000 + $25,000+200)($17,000+$1,000)= $74,000$18,000= 4.11 times

Current ratio for Year 1:

Current ratio = Current AssetsCurrent Liabilities= ($3,900 + $29,000 + $18,000+$100)($18,000+$1,000)= $51,000$19,000= 2.68 times

The current ratio is increased by 1.43 (4.11− 2.68) times at the end of Year 2.

Note: Current assets include Cash, Accounts receivable (net), Merchandise inventory and prepaid expenses. Current liabilities include Accounts payable and Income taxes payable.

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Answer 2

Question

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Chapter 13, Problem 5AP

1)

To determine

Complete the comparing across time analysis of Company S’s comparative financial statement.

1)

Expert Solution

Explanation of Solution

Comparison of across time analysis of financial statements: In this method of analysis of financial statements, the amount of each current year item of the financial statement is compared with the previous year amount. The amount of each item increased or decreased in the current financial statements, and its respective percentage can be computed by taking the earlier statement as the base.

Comparing across time analysis of financial statements of Corporation S:

Corporation S
Comparative Income Statement
Year Ended Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Sales revenue	$ 453,000	$ 447,000	$6,000	1.34%
Cost of goods sold	($ 250,000)	($ 241,000)	($9,000)	3.73%
Gross profit	$ 203,000	$ 206,000	($3,000)	-1.46%
Operating expenses (Including interest on bonds)	($ 167,000)	($ 168,000)	($1,000)	-0.60%
Pre-tax Income	$ 36,000	$ 38,000	($2,000)	-5.26%
Income tax expense	($ 10,800)	($ 11,400)	($600)	-5.26%
Net income	$ 25,200	$ 26,600	($1,400)	-5.26%

Table (1)

Corporation S
Comparative Balance Sheet
As on Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Cash	$ 6,800	$ 3,900	$2,900	74.36%
Accounts receivable (net)	$ 42,000	$ 29,000	$13,000	44.83%
Merchandise Inventory	$ 25,000	$ 18,000	$7,000	38.89%
Prepaid expenses	$ 200	$ 100	$100	100.00%
Property and equipment (net)	$ 130,000	$ 120,000	$10,000	8.33%
Total assets	$ 204,000	$ 171,000	$33,000	19.30%
Accounts payable	$ 17,000	$ 18,000	($1,000)	-5.56%
Income taxes payable	$ 1,000	$ 1,000	$0	0.00%
Bonds payable (Interest rate: 10%)	$ 70,000	$ 50,000	$20,000	40.00%
Common stock($10 par value)	$ 100,000	$ 100,000	$0	0.00%
Retained earnings	$ 16,000	$ 2,000	$14,000	700.00%
Total liabilities and equity	$ 204,000	$ 171,000	$33,000	19.30%

Table (2)

2)

To determine

Determine the amount of current ratio changed from Year 1 to Year 2.

2)

Expert Solution

Explanation of Solution

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Current ratio = Current AssetsCurrent Liabilities

Current ratio for Year 2:

Current ratio = Current AssetsCurrent Liabilities= ($6,800 + $42,000 + $25,000+200)($17,000+$1,000)= $74,000$18,000= 4.11 times

Current ratio for Year 1:

Current ratio = Current AssetsCurrent Liabilities= ($3,900 + $29,000 + $18,000+$100)($18,000+$1,000)= $51,000$19,000= 2.68 times

The current ratio is increased by 1.43 (4.11− 2.68) times at the end of Year 2.

Note: Current assets include Cash, Accounts receivable (net), Merchandise inventory and prepaid expenses. Current liabilities include Accounts payable and Income taxes payable.

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Answer 3

Question

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Chapter 13, Problem 5AP

1)

To determine

Complete the comparing across time analysis of Company S’s comparative financial statement.

1)

Expert Solution

Explanation of Solution

Comparison of across time analysis of financial statements: In this method of analysis of financial statements, the amount of each current year item of the financial statement is compared with the previous year amount. The amount of each item increased or decreased in the current financial statements, and its respective percentage can be computed by taking the earlier statement as the base.

Comparing across time analysis of financial statements of Corporation S:

Corporation S
Comparative Income Statement
Year Ended Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Sales revenue	$ 453,000	$ 447,000	$6,000	1.34%
Cost of goods sold	($ 250,000)	($ 241,000)	($9,000)	3.73%
Gross profit	$ 203,000	$ 206,000	($3,000)	-1.46%
Operating expenses (Including interest on bonds)	($ 167,000)	($ 168,000)	($1,000)	-0.60%
Pre-tax Income	$ 36,000	$ 38,000	($2,000)	-5.26%
Income tax expense	($ 10,800)	($ 11,400)	($600)	-5.26%
Net income	$ 25,200	$ 26,600	($1,400)	-5.26%

Table (1)

Corporation S
Comparative Balance Sheet
As on Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Cash	$ 6,800	$ 3,900	$2,900	74.36%
Accounts receivable (net)	$ 42,000	$ 29,000	$13,000	44.83%
Merchandise Inventory	$ 25,000	$ 18,000	$7,000	38.89%
Prepaid expenses	$ 200	$ 100	$100	100.00%
Property and equipment (net)	$ 130,000	$ 120,000	$10,000	8.33%
Total assets	$ 204,000	$ 171,000	$33,000	19.30%
Accounts payable	$ 17,000	$ 18,000	($1,000)	-5.56%
Income taxes payable	$ 1,000	$ 1,000	$0	0.00%
Bonds payable (Interest rate: 10%)	$ 70,000	$ 50,000	$20,000	40.00%
Common stock($10 par value)	$ 100,000	$ 100,000	$0	0.00%
Retained earnings	$ 16,000	$ 2,000	$14,000	700.00%
Total liabilities and equity	$ 204,000	$ 171,000	$33,000	19.30%

Table (2)

2)

To determine

Determine the amount of current ratio changed from Year 1 to Year 2.

2)

Expert Solution

Explanation of Solution

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Current ratio = Current AssetsCurrent Liabilities

Current ratio for Year 2:

Current ratio = Current AssetsCurrent Liabilities= ($6,800 + $42,000 + $25,000+200)($17,000+$1,000)= $74,000$18,000= 4.11 times

Current ratio for Year 1:

Current ratio = Current AssetsCurrent Liabilities= ($3,900 + $29,000 + $18,000+$100)($18,000+$1,000)= $51,000$19,000= 2.68 times

The current ratio is increased by 1.43 (4.11− 2.68) times at the end of Year 2.

Note: Current assets include Cash, Accounts receivable (net), Merchandise inventory and prepaid expenses. Current liabilities include Accounts payable and Income taxes payable.

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Answer 4

Question

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Chapter 13, Problem 5AP

1)

To determine

Complete the comparing across time analysis of Company S’s comparative financial statement.

1)

Expert Solution

Explanation of Solution

Comparison of across time analysis of financial statements: In this method of analysis of financial statements, the amount of each current year item of the financial statement is compared with the previous year amount. The amount of each item increased or decreased in the current financial statements, and its respective percentage can be computed by taking the earlier statement as the base.

Comparing across time analysis of financial statements of Corporation S:

Corporation S
Comparative Income Statement
Year Ended Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Sales revenue	$ 453,000	$ 447,000	$6,000	1.34%
Cost of goods sold	($ 250,000)	($ 241,000)	($9,000)	3.73%
Gross profit	$ 203,000	$ 206,000	($3,000)	-1.46%
Operating expenses (Including interest on bonds)	($ 167,000)	($ 168,000)	($1,000)	-0.60%
Pre-tax Income	$ 36,000	$ 38,000	($2,000)	-5.26%
Income tax expense	($ 10,800)	($ 11,400)	($600)	-5.26%
Net income	$ 25,200	$ 26,600	($1,400)	-5.26%

Table (1)

Corporation S
Comparative Balance Sheet
As on Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Cash	$ 6,800	$ 3,900	$2,900	74.36%
Accounts receivable (net)	$ 42,000	$ 29,000	$13,000	44.83%
Merchandise Inventory	$ 25,000	$ 18,000	$7,000	38.89%
Prepaid expenses	$ 200	$ 100	$100	100.00%
Property and equipment (net)	$ 130,000	$ 120,000	$10,000	8.33%
Total assets	$ 204,000	$ 171,000	$33,000	19.30%
Accounts payable	$ 17,000	$ 18,000	($1,000)	-5.56%
Income taxes payable	$ 1,000	$ 1,000	$0	0.00%
Bonds payable (Interest rate: 10%)	$ 70,000	$ 50,000	$20,000	40.00%
Common stock($10 par value)	$ 100,000	$ 100,000	$0	0.00%
Retained earnings	$ 16,000	$ 2,000	$14,000	700.00%
Total liabilities and equity	$ 204,000	$ 171,000	$33,000	19.30%

Table (2)

2)

To determine

Determine the amount of current ratio changed from Year 1 to Year 2.

2)

Expert Solution

Explanation of Solution

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Current ratio = Current AssetsCurrent Liabilities

Current ratio for Year 2:

Current ratio = Current AssetsCurrent Liabilities= ($6,800 + $42,000 + $25,000+200)($17,000+$1,000)= $74,000$18,000= 4.11 times

Current ratio for Year 1:

Current ratio = Current AssetsCurrent Liabilities= ($3,900 + $29,000 + $18,000+$100)($18,000+$1,000)= $51,000$19,000= 2.68 times

The current ratio is increased by 1.43 (4.11− 2.68) times at the end of Year 2.

Note: Current assets include Cash, Accounts receivable (net), Merchandise inventory and prepaid expenses. Current liabilities include Accounts payable and Income taxes payable.

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Answer 5

Chapter 13, Problem 5AP

1)

To determine

Complete the comparing across time analysis of Company S’s comparative financial statement.

1)

Expert Solution

Explanation of Solution

Comparison of across time analysis of financial statements: In this method of analysis of financial statements, the amount of each current year item of the financial statement is compared with the previous year amount. The amount of each item increased or decreased in the current financial statements, and its respective percentage can be computed by taking the earlier statement as the base.

Comparing across time analysis of financial statements of Corporation S:

Corporation S
Comparative Income Statement
Year Ended Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Sales revenue	$ 453,000	$ 447,000	$6,000	1.34%
Cost of goods sold	($ 250,000)	($ 241,000)	($9,000)	3.73%
Gross profit	$ 203,000	$ 206,000	($3,000)	-1.46%
Operating expenses (Including interest on bonds)	($ 167,000)	($ 168,000)	($1,000)	-0.60%
Pre-tax Income	$ 36,000	$ 38,000	($2,000)	-5.26%
Income tax expense	($ 10,800)	($ 11,400)	($600)	-5.26%
Net income	$ 25,200	$ 26,600	($1,400)	-5.26%

Table (1)

Corporation S
Comparative Balance Sheet
As on Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Cash	$ 6,800	$ 3,900	$2,900	74.36%
Accounts receivable (net)	$ 42,000	$ 29,000	$13,000	44.83%
Merchandise Inventory	$ 25,000	$ 18,000	$7,000	38.89%
Prepaid expenses	$ 200	$ 100	$100	100.00%
Property and equipment (net)	$ 130,000	$ 120,000	$10,000	8.33%
Total assets	$ 204,000	$ 171,000	$33,000	19.30%
Accounts payable	$ 17,000	$ 18,000	($1,000)	-5.56%
Income taxes payable	$ 1,000	$ 1,000	$0	0.00%
Bonds payable (Interest rate: 10%)	$ 70,000	$ 50,000	$20,000	40.00%
Common stock($10 par value)	$ 100,000	$ 100,000	$0	0.00%
Retained earnings	$ 16,000	$ 2,000	$14,000	700.00%
Total liabilities and equity	$ 204,000	$ 171,000	$33,000	19.30%

Table (2)

2)

To determine

Determine the amount of current ratio changed from Year 1 to Year 2.

2)

Expert Solution

Explanation of Solution

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Current ratio = Current AssetsCurrent Liabilities

Current ratio for Year 2:

Current ratio = Current AssetsCurrent Liabilities= ($6,800 + $42,000 + $25,000+200)($17,000+$1,000)= $74,000$18,000= 4.11 times

Current ratio for Year 1:

Current ratio = Current AssetsCurrent Liabilities= ($3,900 + $29,000 + $18,000+$100)($18,000+$1,000)= $51,000$19,000= 2.68 times

The current ratio is increased by 1.43 (4.11− 2.68) times at the end of Year 2.

Note: Current assets include Cash, Accounts receivable (net), Merchandise inventory and prepaid expenses. Current liabilities include Accounts payable and Income taxes payable.

Answer 6

Chapter 13, Problem 5AP

1)

To determine

Complete the comparing across time analysis of Company S’s comparative financial statement.

1)

Expert Solution

Explanation of Solution

Comparison of across time analysis of financial statements: In this method of analysis of financial statements, the amount of each current year item of the financial statement is compared with the previous year amount. The amount of each item increased or decreased in the current financial statements, and its respective percentage can be computed by taking the earlier statement as the base.

Comparing across time analysis of financial statements of Corporation S:

Corporation S
Comparative Income Statement
Year Ended Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Sales revenue	$ 453,000	$ 447,000	$6,000	1.34%
Cost of goods sold	($ 250,000)	($ 241,000)	($9,000)	3.73%
Gross profit	$ 203,000	$ 206,000	($3,000)	-1.46%
Operating expenses (Including interest on bonds)	($ 167,000)	($ 168,000)	($1,000)	-0.60%
Pre-tax Income	$ 36,000	$ 38,000	($2,000)	-5.26%
Income tax expense	($ 10,800)	($ 11,400)	($600)	-5.26%
Net income	$ 25,200	$ 26,600	($1,400)	-5.26%

Table (1)

Corporation S
Comparative Balance Sheet
As on Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Cash	$ 6,800	$ 3,900	$2,900	74.36%
Accounts receivable (net)	$ 42,000	$ 29,000	$13,000	44.83%
Merchandise Inventory	$ 25,000	$ 18,000	$7,000	38.89%
Prepaid expenses	$ 200	$ 100	$100	100.00%
Property and equipment (net)	$ 130,000	$ 120,000	$10,000	8.33%
Total assets	$ 204,000	$ 171,000	$33,000	19.30%
Accounts payable	$ 17,000	$ 18,000	($1,000)	-5.56%
Income taxes payable	$ 1,000	$ 1,000	$0	0.00%
Bonds payable (Interest rate: 10%)	$ 70,000	$ 50,000	$20,000	40.00%
Common stock($10 par value)	$ 100,000	$ 100,000	$0	0.00%
Retained earnings	$ 16,000	$ 2,000	$14,000	700.00%
Total liabilities and equity	$ 204,000	$ 171,000	$33,000	19.30%

Table (2)

Answer 7

Chapter 13, Problem 5AP

1)

To determine

Complete the comparing across time analysis of Company S’s comparative financial statement.

Answer 8

1)

Expert Solution

Explanation of Solution

Comparison of across time analysis of financial statements: In this method of analysis of financial statements, the amount of each current year item of the financial statement is compared with the previous year amount. The amount of each item increased or decreased in the current financial statements, and its respective percentage can be computed by taking the earlier statement as the base.

Comparing across time analysis of financial statements of Corporation S:

Corporation S
Comparative Income Statement
Year Ended Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Sales revenue	$ 453,000	$ 447,000	$6,000	1.34%
Cost of goods sold	($ 250,000)	($ 241,000)	($9,000)	3.73%
Gross profit	$ 203,000	$ 206,000	($3,000)	-1.46%
Operating expenses (Including interest on bonds)	($ 167,000)	($ 168,000)	($1,000)	-0.60%
Pre-tax Income	$ 36,000	$ 38,000	($2,000)	-5.26%
Income tax expense	($ 10,800)	($ 11,400)	($600)	-5.26%
Net income	$ 25,200	$ 26,600	($1,400)	-5.26%

Table (1)

Corporation S
Comparative Balance Sheet
As on Year 2
Particulars	Year 2	Year 1	Increase (decrease)
Particulars	Amount (A)	Amount (B)	Amount (C) (C=A-B)	Percent (D) (D=C÷B)
Cash	$ 6,800	$ 3,900	$2,900	74.36%
Accounts receivable (net)	$ 42,000	$ 29,000	$13,000	44.83%
Merchandise Inventory	$ 25,000	$ 18,000	$7,000	38.89%
Prepaid expenses	$ 200	$ 100	$100	100.00%
Property and equipment (net)	$ 130,000	$ 120,000	$10,000	8.33%
Total assets	$ 204,000	$ 171,000	$33,000	19.30%
Accounts payable	$ 17,000	$ 18,000	($1,000)	-5.56%
Income taxes payable	$ 1,000	$ 1,000	$0	0.00%
Bonds payable (Interest rate: 10%)	$ 70,000	$ 50,000	$20,000	40.00%
Common stock($10 par value)	$ 100,000	$ 100,000	$0	0.00%
Retained earnings	$ 16,000	$ 2,000	$14,000	700.00%
Total liabilities and equity	$ 204,000	$ 171,000	$33,000	19.30%

Table (2)

Answer 9

1)

Expert Solution

Answer 10

1)

Expert Solution

Answer 11

Expert Solution

Answer 12

2)

To determine

Determine the amount of current ratio changed from Year 1 to Year 2.

2)

Expert Solution

Explanation of Solution

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Current ratio = Current AssetsCurrent Liabilities

Current ratio for Year 2:

Current ratio = Current AssetsCurrent Liabilities= ($6,800 + $42,000 + $25,000+200)($17,000+$1,000)= $74,000$18,000= 4.11 times

Current ratio for Year 1:

Current ratio = Current AssetsCurrent Liabilities= ($3,900 + $29,000 + $18,000+$100)($18,000+$1,000)= $51,000$19,000= 2.68 times

The current ratio is increased by 1.43 (4.11− 2.68) times at the end of Year 2.

Note: Current assets include Cash, Accounts receivable (net), Merchandise inventory and prepaid expenses. Current liabilities include Accounts payable and Income taxes payable.

Answer 13

2)

To determine

Determine the amount of current ratio changed from Year 1 to Year 2.

Answer 14

2)

Expert Solution

Explanation of Solution

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Current ratio = Current AssetsCurrent Liabilities

Current ratio for Year 2:

Current ratio = Current AssetsCurrent Liabilities= ($6,800 + $42,000 + $25,000+200)($17,000+$1,000)= $74,000$18,000= 4.11 times

Current ratio for Year 1:

Current ratio = Current AssetsCurrent Liabilities= ($3,900 + $29,000 + $18,000+$100)($18,000+$1,000)= $51,000$19,000= 2.68 times

The current ratio is increased by 1.43 (4.11− 2.68) times at the end of Year 2.

Note: Current assets include Cash, Accounts receivable (net), Merchandise inventory and prepaid expenses. Current liabilities include Accounts payable and Income taxes payable.