Answer:
a. Current Ratio is 4.33 times
b. Acid Test Ratio is 2.49 times
c. Debt Equity Ratio is 1.52 times
Explanation:
a. Current Ratio : In this ratio, it shows a relationship between current asset and current liabilities.
So, Current ratio = Current Assets ÷ Current liabilities
where current assets = Cash + Accounts receivable + Inventories + Prepaid insurance
So, current assets = $74,000 + $58,000 + $ 64,000 + $34,000 = $230,000
And, Current liabilities = Accounts payable + Interest payable + notes payable
So, current liabilities = $21,500 + $11,500 + $20,000 = $53,000
Now apply these amounts to above formula
= $230,000 ÷ $53,000
= 4.33 times
Hence, Current Ratio is 4.33 times
b. Acid test Ratio : In this ratio, it shows a relationship between quick asset and current liabilities.
So, Acid Test ratio = Quick Assets ÷ Current liabilities
where quick assets = Cash + Accounts receivable
= $74,000 + $58,000
= $132,000
And, Current liabilities = Accounts payable + Interest payable + notes payable
So, current liabilities = $21,500 + $11,500 + $20,000 = $53,000
Now apply these amounts to above formula
= $132,000 ÷ $53,000
= 2.49 times
Hence, Acid Test Ratio is 2.49 times
c. Debt Equity Ratio : The debt equity ratio shows a relationship between total debt and total equity of the firm. It helps to calculate the profitability of the company.
Where total debt includes accounts payable, interest payable, notes payable etc and total equity includes common stock, retained earnings, etc.
So, The formula to compute debt equity ratio
= Total debt ÷ Total Equity
where,
Total debt = Accounts payable + interest payable + notes payable
= $21,500 + $11,500 + $200,000
= $233,000
And total Equity = Common stock + retained earnings
= $89,000 + $64,000
= $153,000
So, debt equity ratio = $233,000 ÷ $153,000
= 1.52 times
