Question

A company has current assets of $90,000 (of which $40,000 is inventory and prepaid items) and current liabilities of $40,000. What is the current ratio? What is the acid-test ratio? If the company borrows $15,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the acid-test ratio be? (R

Answer 1

Answer:

Current ratio = 2.25

Acid test ratio = 1.25

After Taking Loan

Current ratio = 1.64

Acid test ratio = 0.91

Explanation:

Current Ratio is the comparison of company's short term assets and short term liabilities to see if the company is able to pay its short term liabilities.

Current Ratio = Current Assets / Current Liabilities = $90,000 / $40,000 = 2.25 times

The company can pay 2.25 time the current liabilities from its current assets.

Asset test ratio compares company's most short term assets with most short term liabilities to check that if company is able to pay all the immediate liabilities it become due.

Acid Test ratio = ( 90,000 - 40,000 ) / 40,000 = 1.25

After taking the bank loan

Total current Liabilities = $15,000 + 40,000 = $55,000

Current ratio= $90,000 / $55000 = 1.64

Acid test ratio = $50,000 / $55000 = 0.91