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Financial Ratios Explained and Calculated

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Answer each of the questions in the following unrelated situations.

(a) The current ratio of a company is 6:1 and its acid-test ratio is 1:1. If the inventories and prepaid items amount to $496,400, what is the amount of current liabilities? (Round answers to 0 decimal places eg 75,481)


(b) A company had an average inventory last year of $158,100 and its inventory turnover was 6. If sales volume and unit cost remain the same this year as last and inventory turnover is 7 this year, what will average inventory have to be during the current year? (Round answers to two decimal places eg 5.45)


(c) A company has current assets of $87,860 (of which $41,900 is inventory and prepaid items) and current liabilities of $44,950. Compute the following ratios. (Round answers to two decimal places eg 5.45)

What is the current ratio? :1

What is the acid-test ratio? :1

If the company borrows $17,460 cash from a bank on a 120-day loan, what will its current ratio be? :1

What will the acid-test ratio be? :1

(d) A company has current assets of $588,200 and current liabilities of $213,900. The board of directors declares a cash dividend of $161,300. (Round answers to two decimal places eg 5.45)

What is the current ratio after the declaration but before payment? :1

What is the current ratio after the payment of the dividend? :1

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Solution Summary

This solution is comprised of a detailed explanation of financial ratios, how they are used and how they are calculate. A step-by-step solution to a question is included here.

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