Question

Ace Industries has current assets equal to $3 million. The company's current ratio is 1.5, and its quick ratio is 1.1. What is the firm's level of current liabilities? What is the firm's level of inventories? Do not round intermediate calculations. Round your answers to the nearest dollar. Current liabilities: $ 2000000 Inventories:

Answer 1

Answer:

Current Liabilities = $2000000

Inventories = $800000

Explanation:

The current ratio and quick ratios both are measures to assess the liquidity position of businesses. These are useful indicators of how well the business is equipped to meet its current obligations using its most liquid assets.

The current ratio is calculated as follows,

Current Ratio = Current Assets / Current Liabilities

The quick ratio is calculated as follows,

Quick Ratio = (Current Assets - Inventories) / Current Liabilities

To calculate the inventory level, we must first determine the value of current liabilities using the current ratio.

1.5 = 3000000 / Current Liabilities

Current Liabilities = 3000000 / 1.5

Current Liabilities = $2000000

Using the quick ratio, we can calculate the level of inventories.

1.1 = (3000000 - Inventories) / 2000000

1.1 * 2000000 = 3000000 - Inventories

2200000 = 3000000 - Inventories

Inventories = 3000000 - 2200000

Inventories = $800000