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1.
Calculate the
1.
Explanation of Solution
Current ratio:
The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.
Formula:
The current ratio of Company B for the past two year is as follows:
For 2018:
For 2017:
From the above calculation it is clear that the current ratio in the most recent year (2018) has been declined.
2.
Calculate the acid test ratio for the past two year, and discuss whether the acid test ratio has been increased or decreased in the most recent year.
2.
Explanation of Solution
Acid-test ratio:
The financial ratio which evaluates the ability of a company to pay off the instant debt obligations is referred to as quick ratio. Quick assets are cash, marketable securities, and accounts receivables. This ratio assesses the short-term liquidity of a company.
Formula:
The acid test ratio of Company B for the past two year is as follows:
For 2018:
In 2017:
From the above calculation it is clear that the acid test ratio in the most recent year (2018) has been declined.
3.
Explain the manner in which the current ratio and acid test ratio will change, if Company B purchased $50 million of inventory by debiting inventory and crediting accounts payable.
3.
Explanation of Solution
Calculate the current ratio of company B, if company purchased $50 million of inventory by debiting inventory and crediting accounts payable.
If the company purchase $50 million of inventory, both current assets (inventory) and current liabilities (accounts payable) get increased by $50 million. Thus, this transaction decreases the current ratio. The calculation is as given below:
Calculate acid-test ratio if company purchased $50 million of inventory by debiting inventory and crediting accounts payable.
If the company purchases $50 million of inventory, the current liabilities increase by $50 million, but the quick assets remain same. Hence, this transaction decreases the acid-test ratio. The calculation is as given below:
Therefore, both current and acid test ratio is decreased.
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Chapter 8 Solutions
Financial Accounting
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