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Concept introduction:
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:
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:
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 34CE
The Current Ratio is 2.33.
Explanation of Solution
The Current Ratio is calculated as follows:
| Cash | $ 3,125,000 |
| Marketable Securities | $ 1,850,000 |
| $ 3,150,000 | |
| Inventory | $ 4,200,000 |
| Total Current Assets (A) | $ 12,325,000 |
| Accounts Payable | $ 3,500,000 |
| Accrued Expenses | $ 1,800,000 |
| Total Current Liabilities (B) | $ 5,300,000 |
| Current Ratio (A/B) | 2.33 |
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:
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:
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 34CE
The Quick Ratio is 1.53.
Explanation of Solution
The Quick Ratio is calculated as follows:
| Cash | $ 3,125,000 |
| Marketable Securities | $ 1,850,000 |
| Accounts Receivables | $ 3,150,000 |
| Total Quick Assets (A) | $ 8,125,000 |
| Accounts Payable | $ 3,500,000 |
| Accrued Expenses | $ 1,800,000 |
| Total Current Liabilities (B) | $ 5,300,000 |
| Quick Ratio (A/B) | 1.53 |
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:
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:
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 34CE
The Cash Ratio is 0.96.
Explanation of Solution
The Cash Ratio is calculated as follows:
| Cash | $ 3,125,000 |
| Marketable Securities | $ 1,850,000 |
| Cash and Cash Equivalents (A) | $ 4,975,000 |
| Accounts Payable | $ 3,500,000 |
| Accrued Expenses | $ 1,800,000 |
| Total Current Liabilities (B) | $ 5,300,000 |
| Cash Ratio (A/B) | 0.94 |
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:
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:
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 34CE
The Cash ratio shows that company does not have a good liquidity position.
Explanation of Solution
The Current, Quick and Cash ratio shows liquidity position as follows:
| Cash | $ 3,125,000 |
| Marketable Securities | $ 1,850,000 |
| Accounts Receivables | $ 3,150,000 |
| Inventory | $ 4,200,000 |
| Total Current Assets (A) | $ 12,325,000 |
| Accounts Payable | $ 3,500,000 |
| Accrued Expenses | $ 1,800,000 |
| Total Current Liabilities (B) | $ 5,300,000 |
| Current Ratio (A/B) | 2.33 |
| Cash | $ 3,125,000 |
| Marketable Securities | $ 1,850,000 |
| Accounts Receivables | $ 3,150,000 |
| Total Quick Assets (A) | $ 8,125,000 |
| Accounts Payable | $ 3,500,000 |
| Accrued Expenses | $ 1,800,000 |
| Total Current Liabilities (B) | $ 5,300,000 |
| Quick Ratio (A/B) | 1.53 |
| Cash | $ 3,125,000 |
| Marketable Securities | $ 1,850,000 |
| Cash and Cash Equivalents (A) | $ 4,975,000 |
| Accounts Payable | $ 3,500,000 |
| Accrued Expenses | $ 1,800,000 |
| Total Current Liabilities (B) | $ 5,300,000 |
| Cash Ratio (A/B) | 0.94 |
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Chapter 8 Solutions
Cornerstones of Financial Accounting
- Liquidity Ratios NWAs 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 NWAs liquidity using these ratios.arrow_forwardLiquidity Ratios JRLs financial statements contain the following information: Required: 1. What is its current ratio? 2. What is its quick ratio? 3. What is its cash ratio? 4. Discuss JRLs liquidity using these ratios.arrow_forward_____________ are used to measure the speed in which various accounts are converted into sales or cash. Select one: a.Liquidity ratios b.Profitability ratios. c.Activity ratios d.Debt ratiosarrow_forward
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- Select the Income Statements and Balance Sheets of Aramco Saudi from the calculate the following financial ratios: a. Long-term debt ratios b. Total debt ratio c. Times interest earned d. Cash coverage ration e. current ratio f. Quick ratio g. Operating profit margin h. Inventory Turnover i. Days in inventory j. Average collection period k. Return on equity I. Return on assets m. Payout rationsarrow_forwardVertical analysis: a. Is also known as common-size analysis b. Is a technique for evaluating financial statement data that expresses each item in a financial statement as a percentage of a base amount c. All of the above.arrow_forwardMethodology:• Based on the above information the consulting group will conduct ratio analysis for the following ratios:o Current ratio o Receivable’s turnover o Times’s interest earned o Profit margin o Days in inventory o Return on assets o Cash current debt coverage ratio • As a next step the group will compare the ratios calculated above with industry benchmarks. The benchmarks are indicated within brackets besides each ratio.o Current ratio (3 to 1) o Receivable’s turnover (13 times) o Times’s interest earned (9 times) o Profit margin (12%) o Days in inventory (50 days) o Return on assets (12%) o Cash current debt coverage ratio (2 timesarrow_forward
- Help me pleasearrow_forwardWhich of the following is included in the calculation of the quick (acid-test) ratio?a. Inventory and short-term investmentsb. Inventory and prepaid expensesc. Cash and accounts receivabled. Prepaid expenses and casharrow_forward5. Know the calculations for all of the following ratios (see ratio sheet that can be used on the exam) and know the category (listed in Question 4) they fall in: Formula Category/Use Ratio Working Capital Current Assets - Current Liabilities Net credit sales/Average Accounts Receivable Turnover accounts receivable Asset Turnover Net sales/Average total assets Net income/Average total stockholders' equity Total liabilities/Total stockholders equity Net income/Net sales Return on Equity (ROE) Debt to equity Return on Sales (ROS) (also known as Net Margin Current Assets/Current Liabilities Cost of goods sold/Average inventory Quick assets/Current Current Ratio Inventory Turnover Quick Ratio liabilities Dividend Yield Dividends per share/Market price per share Net earnings available for common stock/Number of outstanding common shares Net income/Average total Earnings per Share (EPS) Return on Investment (ROI) assets Price Earnings Ratio (P/E) Market price per share/Earnings per share…arrow_forward
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning