FINANCIAL ACCOUNTINGLL W/CONNECT >IC<
FINANCIAL ACCOUNTINGLL W/CONNECT >IC<
4th Edition
ISBN: 9781259934773
Author: SPICELAND
Publisher: MCG
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Chapter 8, Problem 8.3APFA

Requirement – 1

To determine

To calculate: The current ratio for the past two year, and discuss whether the current ratio improve or weaken in the most recent year.

Requirement – 1

Expert Solution
Check Mark

Explanation of Solution

Current ratio:

Current ratio is used to determine the relationship between current assets and current liabilities. Current ratio is determined by dividing current assets and current liabilities.

Formula:

Current Ratio=Current assetsCurrentliabilities

The current ratio of Company B for the past two year is as follows:

In 2015:

Here,

Current assets = $324,589 thousand

Current liabilities = $122,271 thousand

Current ratio=Current assetsCurrentliabilities=$324,589thousand$122,271thousand=2.66 times

In 2014:

Current assets = $342,137 thousand

Current liabilities = $132,381 thousand

Current ratio=Current assetsCurrentliabilities=$342,137thousand$123,381thousand=2.77 times

Conclusion

Therefore, the current ratio in the most recent year (2015) is weakened.

Requirement – 2

To determine

To calculate: The acid test ratio for the past two year, and discuss whether the acid test ratio improve or weaken in the most recent year.

Requirement – 2

Expert Solution
Check Mark

Explanation of Solution

Acid-test Ratio:

It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets that are current assets except inventory and prepaid expenses.

Formula:

Acid-test Ratio=Cash+Accounts Receivable+Short-term InvestmentsCurrent Liabilities

The acid test ratio of Company B for the past two year is as follows:

In 2015:

Here,

Cash= $133,708 thousand

Accounts receivable = $8,567 thousand

Short-term investment= $25,857 thousand

Current liabilities = $122,271 thousand

Acid-test ratio=(Cash+Short-term investments+Accounts receivable)Current liabilities=($133,708thousand+$25,857thousand+$8,567thousand)$122,271thousand=1.38times

In 2014:

Here,

Cash= $164,868 thousand

Accounts receivable = $4,318 thousand

Short-term investment= $20,197 thousand

Current liabilities = $123,381 thousand

Acid-test ratio=(Cash+Short-term investments+Accounts receivable)Current liabilities=($164,868thousand+$20,197thousand+$4,318thousand)$123,381thousand=1.53times

Conclusion

Therefore, the acid test ratio in the most recent year (2015) is weakened.

Requirement – 3

To determine

The manner in which the current ratio and acid test ratio will change, if Company B purchased $50 million of inventory by debiting inventory and crediting accounts payable.

Requirement – 3

Expert Solution
Check Mark

Explanation of Solution

Calculate current ratio if company purchased $50 million of inventory by debiting inventory and crediting accounts payable.

If the company purchases $50 million of inventory, the current assets (inventory) and the current liabilities (accounts payable) both increase by $50 million. Thus, this transaction decreases the current ratio. The calculation is as given below:

Current Ratio=Current assetsCurrentliabilities=$324,589,000+$50,000,000$122,271,000+$50,000,000=2.18 times

Calculate acid-test ratio if company purchased $50 million of inventory by debiting inventory and crediting accounts payable.

If the company purchases $50 million of inventory, the current liabilities increase by $50 million, but the quick assets remain same.  Hence, this transaction decreases the acid-test ratio. The calculation is as given below:

Acid-test ratio=(Cash+Short-term investments+Accounts receivable)Current liabilities=($133,708,000+$25,857,000+$8,567,000+$50,000,000)$122,271,000+$50,000,000=1.27times

Conclusion

Therefore, both current and acid test ratio is decreased.

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Chapter 8 Solutions

FINANCIAL ACCOUNTINGLL W/CONNECT >IC<

Ch. 8 - Prob. 11RQCh. 8 - Prob. 12RQCh. 8 - Prob. 13RQCh. 8 - Prob. 14RQCh. 8 - Prob. 15RQCh. 8 - Prob. 16RQCh. 8 - Prob. 17RQCh. 8 - Prob. 18RQCh. 8 - Prob. 19RQCh. 8 - Prob. 20RQCh. 8 - Prob. 21RQCh. 8 - Prob. 22RQCh. 8 - Prob. 23RQCh. 8 - Record notes payable (LO82) Flip Side of BE82 On...Ch. 8 - Prob. 8.2BECh. 8 - Record notes receivable (LO82) Flip Side of BE81...Ch. 8 - Determine interest expense (LO82) Record...Ch. 8 - Prob. 8.5BECh. 8 - Record deferred revenues (LO84) On December 18,...Ch. 8 - Prob. 8.7BECh. 8 - Prob. 8.8BECh. 8 - Prob. 8.9BECh. 8 - Prob. 8.10BECh. 8 - Prob. 8.11BECh. 8 - Prob. 8.12BECh. 8 - Prob. 8.13BECh. 8 - Prob. 8.14BECh. 8 - Prob. 8.15BECh. 8 - Determine proper classification of liabilities...Ch. 8 - Prob. 8.2ECh. 8 - Prob. 8.3ECh. 8 - Prob. 8.4ECh. 8 - Determine interest expense (LO82) OS Environmental...Ch. 8 - Record a line of credit (LO82) The following...Ch. 8 - Calculate payroll withholdings and payroll taxes...Ch. 8 - Record payroll (LO83) During January, Luxury...Ch. 8 - Prob. 8.9ECh. 8 - Prob. 8.10ECh. 8 - Analyze and record a contingent liability (LO85)...Ch. 8 - Prob. 8.12ECh. 8 - Prob. 8.13ECh. 8 - Prob. 8.14ECh. 8 - Prob. 8.15ECh. 8 - Complete the accounting cycle using current...Ch. 8 - Prob. 8.1APCh. 8 - Prob. 8.2APCh. 8 - Prob. 8.3APCh. 8 - Record Payroll (LOS3) Vacation Destinations offers...Ch. 8 - Prob. 8.5APCh. 8 - Prob. 8.6APCh. 8 - Prob. 8.7APCh. 8 - Prob. 8.8APCh. 8 - Selected financial data regarding current assets...Ch. 8 - Prob. 8.1BPCh. 8 - Prob. 8.2BPCh. 8 - Prob. 8.3BPCh. 8 - Record Emily Turnbull, president of Aerobic...Ch. 8 - Prob. 8.5BPCh. 8 - Logins Roadhouse opened a new restaurant in...Ch. 8 - Record contingencies (LO85) Compact Electronics is...Ch. 8 - Prob. 8.8BPCh. 8 - Calculate and analyze rates (LO86) Selected...Ch. 8 - Great AdventuresContinuing Problem (This is a...Ch. 8 - Prob. 8.2APFACh. 8 - Prob. 8.3APFACh. 8 - Comparative Analysis American Eagle Outfitters,...Ch. 8 - Prob. 8.5APECh. 8 - Written Communication Western Manufacturing is...Ch. 8 - Earnings Management Quattro Technologies, a...
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