Chapter 8, Problem 33CE

Liquidity Ratios

NWA’s financial statements contain the following information:

Note: Round answers to two decimal places.

Required:

1. What is its current ratio?

2. What is its quick ratio?

3. What is its cash ratio?

4. Discuss NWA’s liquidity using these ratios.

To determine

Concept introduction:

Current Ratio:

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

$CurrentRatio=\frac{Currentassets}{Currentliabilities}$

Acid test ratio:

Acid test ration is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

$Acidtestratio=\frac{\left(Cash+Cashequivalents+Shortterminvestments+Accountsreceivables\right)}{CurrentLiabilities}$

Cash ratio:

Cash ratio is calculated by dividing and cash and cash equivalents by the total current liabilities. The formula for Cash ratio is as follows:

Cash Ratio = Cash and cash equivalents/ Current liabilities

Requirement 1:

To calculate:

The Current Ratio.

Answer to Problem 33CE

The Current Ratio is 2.85.

Explanation of Solution

The Current Ratio is calculated as follows:

Cash	$ 300,000
Marketable Securities	$ 650,000
Accounts Receivables	$ 800,000
Inventory	$ 100,000
Total Current Assets (A)	$ 1,850,000
Accounts Payable	$ 500,000
Accrued Expenses	$ 150,000
Total Current Liabilities (B)	$ 650,000
Current Ratio (A/B)	2.85

To determine

Concept introduction:

Current Ratio:

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

$CurrentRatio=\frac{Currentassets}{Currentliabilities}$

Acid test ratio:

Acid test ration is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

$Acidtestratio=\frac{\left(Cash+Cashequivalents+Shortterminvestments+Accountsreceivables\right)}{CurrentLiabilities}$

Cash ratio:

Cash ratio is calculated by dividing and cash and cash equivalents by the total current liabilities. The formula for Cash ratio is as follows:

Cash Ratio = Cash and cash equivalents/ Current liabilities

Requirement 2:

To calculate:

The Quick Ratio.

Answer to Problem 33CE

The Quick Ratio is 2.69.

Explanation of Solution

The Quick Ratio is calculated as follows:

Cash	$ 300,000
Marketable Securities	$ 650,000
Accounts Receivables	$ 800,000
Total Quick Assets (A)	$ 1,750,000
Accounts Payable	$ 500,000
Accrued Expenses	$ 150,000
Total Current Liabilities (B)	$ 650,000
Quick Ratio (A/B)	2.69

To determine

Concept introduction:

Current Ratio:

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

$CurrentRatio=\frac{Currentassets}{Currentliabilities}$

Acid test ratio:

Acid test ration is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

$Acidtestratio=\frac{\left(Cash+Cashequivalents+Shortterminvestments+Accountsreceivables\right)}{CurrentLiabilities}$

Cash ratio:

Cash ratio is calculated by dividing and cash and cash equivalents by the total current liabilities. The formula for Cash ratio is as follows:

Cash Ratio = Cash and cash equivalents/ Current liabilities

Requirement 3:

To calculate:

The Cash Ratio.

Answer to Problem 33CE

The Cash Ratio is 1.46.

Explanation of Solution

The Cash Ratio is calculated as follows:

Cash	$ 300,000
Marketable Securities	$ 650,000
Cash and Cash Equivalents (A)	$ 950,000
Accounts Payable	$ 500,000
Accrued Expenses	$ 150,000
Total Current Liabilities (B)	$ 650,000
Cash Ratio (A/B)	1.46

To determine

Concept introduction:

Current Ratio:

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

$CurrentRatio=\frac{Currentassets}{Currentliabilities}$

Acid test ratio:

Acid test ration is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

$Acidtestratio=\frac{\left(Cash+Cashequivalents+Shortterminvestments+Accountsreceivables\right)}{CurrentLiabilities}$

Cash ratio:

Cash ratio is calculated by dividing and cash and cash equivalents by the total current liabilities. The formula for Cash ratio is as follows:

Cash Ratio = Cash and cash equivalents/ Current liabilities

Requirement 4:

To discuss:

Liquidity of the company.

Answer to Problem 33CE

The Current, Quick and Cash ratio shows that company has a good liquidity position.

Explanation of Solution

The Current, Quick and Cash ratio shows that company has a good liquidity position as follows:

Cash	$ 300,000
Marketable Securities	$ 650,000
Accounts Receivables	$ 800,000
Inventory	$ 100,000
Total Current Assets (A)	$ 1,850,000
Accounts Payable	$ 500,000
Accrued Expenses	$ 150,000
Total Current Liabilities (B)	$ 650,000
Current Ratio (A/B)	2.85
Cash	$ 300,000
Marketable Securities	$ 650,000
Accounts Receivables	$ 800,000
Total Quick Assets (A)	$ 1,750,000
Accounts Payable	$ 500,000
Accrued Expenses	$ 150,000
Total Current Liabilities (B)	$ 650,000
Quick Ratio (A/B)	2.69
Cash	$ 300,000
Marketable Securities	$ 650,000
Cash and Cash Equivalents (A)	$ 950,000
Accounts Payable	$ 500,000
Accrued Expenses	$ 150,000
Total Current Liabilities (B)	$ 650,000
Cash Ratio (A/B)	1.46