Current ratio : It is also known as working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses. Acid- test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses. To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Question

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Answer 1

Question

Chapter 5, Problem 14E

To determine

Concept Introduction:

Current ratio: It is also known as working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses.

Acid- test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses.

To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Expert Solution & Answer

Explanation of Solution

Calculation of current ratio and acid test ratio:

Company	Current ratio (Current assets/Current Liabilities)	Acid- test ratio ((Current assets-Inventory-Prepaid Expenses) /Current Liabilities)
Case X	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350 + $ 2, 600 + $ 200) \\ \div $ 2, 000) \\ = 2.60 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350) \\ \div $ 2, 000) \\ = 1.20 \end{array}$
Case Y	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470 + $ 2, 420 + $ 500) \\ \div $ 1, 000) \\ = 3.50 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470) \\ \div $ 1, 000) \\ = 0.58 \end{array}$
Case Z	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700 + $ 4, 230 + $ 900) \\ \div $ 3, 800) \\ = 1.95 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700) \\ \div $ 3, 800) \\ = 0.60 \end{array}$

Analysis- The Company which is in a better position to pay its current liabilities out of its current assets:

Generally, current asset ratio of 2:1 or higher is considered to be good. It depicts that the current assets should be twice of its current liabilities while the acid- test ratio of higher than 1 is considered to be good. Liquidity ratios such as current ratio and acid test ratio of less than 1 always show that the current liabilities are more compared to the current assets.

Hence, Case X is in a better position to pay its current liabilities because both the ratios are higher than 1. It indicates that the company has sufficient current assets to pay its dues on time.

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Answer 2

Question

Chapter 5, Problem 14E

To determine

Concept Introduction:

Current ratio: It is also known as working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses.

Acid- test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses.

To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Expert Solution & Answer

Explanation of Solution

Calculation of current ratio and acid test ratio:

Company	Current ratio (Current assets/Current Liabilities)	Acid- test ratio ((Current assets-Inventory-Prepaid Expenses) /Current Liabilities)
Case X	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350 + $ 2, 600 + $ 200) \\ \div $ 2, 000) \\ = 2.60 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350) \\ \div $ 2, 000) \\ = 1.20 \end{array}$
Case Y	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470 + $ 2, 420 + $ 500) \\ \div $ 1, 000) \\ = 3.50 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470) \\ \div $ 1, 000) \\ = 0.58 \end{array}$
Case Z	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700 + $ 4, 230 + $ 900) \\ \div $ 3, 800) \\ = 1.95 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700) \\ \div $ 3, 800) \\ = 0.60 \end{array}$

Analysis- The Company which is in a better position to pay its current liabilities out of its current assets:

Generally, current asset ratio of 2:1 or higher is considered to be good. It depicts that the current assets should be twice of its current liabilities while the acid- test ratio of higher than 1 is considered to be good. Liquidity ratios such as current ratio and acid test ratio of less than 1 always show that the current liabilities are more compared to the current assets.

Hence, Case X is in a better position to pay its current liabilities because both the ratios are higher than 1. It indicates that the company has sufficient current assets to pay its dues on time.

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Answer 3

Question

Chapter 5, Problem 14E

To determine

Concept Introduction:

Current ratio: It is also known as working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses.

Acid- test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses.

To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Expert Solution & Answer

Explanation of Solution

Calculation of current ratio and acid test ratio:

Company	Current ratio (Current assets/Current Liabilities)	Acid- test ratio ((Current assets-Inventory-Prepaid Expenses) /Current Liabilities)
Case X	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350 + $ 2, 600 + $ 200) \\ \div $ 2, 000) \\ = 2.60 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350) \\ \div $ 2, 000) \\ = 1.20 \end{array}$
Case Y	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470 + $ 2, 420 + $ 500) \\ \div $ 1, 000) \\ = 3.50 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470) \\ \div $ 1, 000) \\ = 0.58 \end{array}$
Case Z	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700 + $ 4, 230 + $ 900) \\ \div $ 3, 800) \\ = 1.95 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700) \\ \div $ 3, 800) \\ = 0.60 \end{array}$

Analysis- The Company which is in a better position to pay its current liabilities out of its current assets:

Generally, current asset ratio of 2:1 or higher is considered to be good. It depicts that the current assets should be twice of its current liabilities while the acid- test ratio of higher than 1 is considered to be good. Liquidity ratios such as current ratio and acid test ratio of less than 1 always show that the current liabilities are more compared to the current assets.

Hence, Case X is in a better position to pay its current liabilities because both the ratios are higher than 1. It indicates that the company has sufficient current assets to pay its dues on time.

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Answer 4

Question

Chapter 5, Problem 14E

To determine

Concept Introduction:

Current ratio: It is also known as working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses.

Acid- test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses.

To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Expert Solution & Answer

Explanation of Solution

Calculation of current ratio and acid test ratio:

Company	Current ratio (Current assets/Current Liabilities)	Acid- test ratio ((Current assets-Inventory-Prepaid Expenses) /Current Liabilities)
Case X	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350 + $ 2, 600 + $ 200) \\ \div $ 2, 000) \\ = 2.60 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350) \\ \div $ 2, 000) \\ = 1.20 \end{array}$
Case Y	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470 + $ 2, 420 + $ 500) \\ \div $ 1, 000) \\ = 3.50 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470) \\ \div $ 1, 000) \\ = 0.58 \end{array}$
Case Z	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700 + $ 4, 230 + $ 900) \\ \div $ 3, 800) \\ = 1.95 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700) \\ \div $ 3, 800) \\ = 0.60 \end{array}$

Analysis- The Company which is in a better position to pay its current liabilities out of its current assets:

Generally, current asset ratio of 2:1 or higher is considered to be good. It depicts that the current assets should be twice of its current liabilities while the acid- test ratio of higher than 1 is considered to be good. Liquidity ratios such as current ratio and acid test ratio of less than 1 always show that the current liabilities are more compared to the current assets.

Hence, Case X is in a better position to pay its current liabilities because both the ratios are higher than 1. It indicates that the company has sufficient current assets to pay its dues on time.

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Answer 5

Chapter 5, Problem 14E

To determine

Concept Introduction:

Current ratio: It is also known as working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses.

Acid- test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses.

To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Expert Solution & Answer

Explanation of Solution

Calculation of current ratio and acid test ratio:

Company	Current ratio (Current assets/Current Liabilities)	Acid- test ratio ((Current assets-Inventory-Prepaid Expenses) /Current Liabilities)
Case X	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350 + $ 2, 600 + $ 200) \\ \div $ 2, 000) \\ = 2.60 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350) \\ \div $ 2, 000) \\ = 1.20 \end{array}$
Case Y	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470 + $ 2, 420 + $ 500) \\ \div $ 1, 000) \\ = 3.50 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470) \\ \div $ 1, 000) \\ = 0.58 \end{array}$
Case Z	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700 + $ 4, 230 + $ 900) \\ \div $ 3, 800) \\ = 1.95 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700) \\ \div $ 3, 800) \\ = 0.60 \end{array}$

Analysis- The Company which is in a better position to pay its current liabilities out of its current assets:

Generally, current asset ratio of 2:1 or higher is considered to be good. It depicts that the current assets should be twice of its current liabilities while the acid- test ratio of higher than 1 is considered to be good. Liquidity ratios such as current ratio and acid test ratio of less than 1 always show that the current liabilities are more compared to the current assets.

Hence, Case X is in a better position to pay its current liabilities because both the ratios are higher than 1. It indicates that the company has sufficient current assets to pay its dues on time.

Answer 6

Chapter 5, Problem 14E

To determine

Concept Introduction:

Current ratio: It is also known as working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses.

Acid- test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses.

To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Expert Solution & Answer

Explanation of Solution

Calculation of current ratio and acid test ratio:

Company	Current ratio (Current assets/Current Liabilities)	Acid- test ratio ((Current assets-Inventory-Prepaid Expenses) /Current Liabilities)
Case X	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350 + $ 2, 600 + $ 200) \\ \div $ 2, 000) \\ = 2.60 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350) \\ \div $ 2, 000) \\ = 1.20 \end{array}$
Case Y	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470 + $ 2, 420 + $ 500) \\ \div $ 1, 000) \\ = 3.50 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470) \\ \div $ 1, 000) \\ = 0.58 \end{array}$
Case Z	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700 + $ 4, 230 + $ 900) \\ \div $ 3, 800) \\ = 1.95 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700) \\ \div $ 3, 800) \\ = 0.60 \end{array}$

Analysis- The Company which is in a better position to pay its current liabilities out of its current assets:

Generally, current asset ratio of 2:1 or higher is considered to be good. It depicts that the current assets should be twice of its current liabilities while the acid- test ratio of higher than 1 is considered to be good. Liquidity ratios such as current ratio and acid test ratio of less than 1 always show that the current liabilities are more compared to the current assets.

Hence, Case X is in a better position to pay its current liabilities because both the ratios are higher than 1. It indicates that the company has sufficient current assets to pay its dues on time.

Answer 7

Chapter 5, Problem 14E

To determine

Concept Introduction:

Current ratio: It is also known as working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses.

Acid- test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses.

To Determine: The current ratio and the acid test ratios of the given companies and also analyze which company is in a better position to pay its current liabilities.

Answer 8

Expert Solution & Answer

Explanation of Solution

Calculation of current ratio and acid test ratio:

Company	Current ratio (Current assets/Current Liabilities)	Acid- test ratio ((Current assets-Inventory-Prepaid Expenses) /Current Liabilities)
Case X	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350 + $ 2, 600 + $ 200) \\ \div $ 2, 000) \\ = 2.60 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 2, 000 + $ 50 + $ 350) \\ \div $ 2, 000) \\ = 1.20 \end{array}$
Case Y	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470 + $ 2, 420 + $ 500) \\ \div $ 1, 000) \\ = 3.50 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 110 + $ 0 + $ 470) \\ \div $ 1, 000) \\ = 0.58 \end{array}$
Case Z	$\begin{array}{l} C u r r e n t R a t i o = C u r r e n t a s s e t s \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700 + $ 4, 230 + $ 900) \\ \div $ 3, 800) \\ = 1.95 \end{array}$	$\begin{array}{l} A c i d t e s t r a t i o = (C . A . - I n v e n t o r y - \Pr e p a i d \exp e n s e s) \\ \div C u r r e n t l i a b i l i t i e s \\ = (($ 1, 000 + $ 580 + $ 700) \\ \div $ 3, 800) \\ = 0.60 \end{array}$

Analysis- The Company which is in a better position to pay its current liabilities out of its current assets:

Generally, current asset ratio of 2:1 or higher is considered to be good. It depicts that the current assets should be twice of its current liabilities while the acid- test ratio of higher than 1 is considered to be good. Liquidity ratios such as current ratio and acid test ratio of less than 1 always show that the current liabilities are more compared to the current assets.

Hence, Case X is in a better position to pay its current liabilities because both the ratios are higher than 1. It indicates that the company has sufficient current assets to pay its dues on time.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Ch. 5 - Prob. 1DQ Ch. 5 - 2. In comparing the accounts of a merchandising...Ch. 5 - Prob. 3DQ Ch. 5 - Prob. 4DQ Ch. 5 - Prob. 5DQ Ch. 5 - Prob. 6DQ Ch. 5 - Prob. 7DQ Ch. 5 - Prob. 8DQ Ch. 5 - Prob. 9DQ Ch. 5 - Prob. 10DQ

Explanation of Solution

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Chapter 5 Solutions