Question

Assume that the current ratio for Arch Company is 3.0, its acid-test ratio is 1.5, and its working capital is $310,000.
Answer each of the following questions independently, always referring to the original information.
a) How much does the firm have in current liabilities?
b) If the only current assets shown on the balance sheet for Arch Company are Cash, Accounts Receivable, and Merchandise Inventory, then how much does the firm have in Merchandise Inventory?
c) If the firm collects an account receivable of $108,000, then what will its new current ratio and working capital be?
d) If the firm pays an account payable of $57,000, then what will its new current ratio and working capital be?
e) If the firm sells inventory that was purchased for $50,000 at a cash price of $65,000, then what will its new acid-test ratio be?

Answer 1

Answer:

a) $155,000

b) $232,500

c) current ratio = 3, working capital = $310,000

d) current ratio = 4.16, working capital = $310,000

e) 1.92

Explanation:

current ratio = current assets / current liabilities = 3

acid test ratio = (current assets - inventory) / current liabilities = 1.5

working capital = current assets - current liabilities = $310,000

a) current liabilities = current assets - $310,000

3 = current assets / (current assets - $310,000)

3 current assets - $930,000 = current assets

2 current assets = $930,000

current assets = $465,000

current liabilities = $465,000 - $310,000 = $155,000

b) current liabilities = current assets / 3

current liabilities = (current assets - merchandise inventory) / 1.5

current assets / 3 = (current assets - merchandise inventory) / 1.5

current assets = 2 current assets - 2 merchandise inventories

current asset = 2 merchandise inventories

$465,000 = 2 merchandise inventories

merchandise inventory = $232,500

c) nothing changes, since a current asset is replaced by another current asset

d) $408,000 / $98,000 = 4.16

e) $297,500 / $155,000 = 1.92

Answer 2

a) $155,000

b) $232,500

c) current ratio is = 3, working capital = $310,000

d) current ratio is = 4.16, working capital = $310,000

e) 1.92

Calculation of Current Ratio

The formula current ratio is = current assets / current liabilities = 3

Then, the acid test ratio is = (current assets - inventory) / current liabilities = 1.5

After that, working capital = current assets - current liabilities = $310,000

a) current liabilities is = current assets - $310,000

Then, 3 = current assets / (current assets - $310,000)

After that, 3 current assets - $930,000 = current assets

Then, 2 current assets = $930,000

The current assets is = $465,000

Therefore, current liabilities = $465,000 - $310,000 = $155,000

b) current liabilities is = current assets / 3

Then, current liabilities = (current assets - merchandise inventory) / 1.5

After that, current assets / 3 = (current assets - merchandise inventory) / 1.5

Now, current assets = 2 current assets - 2 merchandise inventories

Then, current asset = 2 merchandise inventories

$465,000 = 2 merchandise inventories

Hence, merchandise inventory = $232,500

c) When the nothing changes, since a current asset is replaced by another current asset

d) $408,000 / $98,000 is = 4.16

e) $297,500 / $155,000 is = 1.92

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