A company has current assets of $97,000 (of which $37,000 is inventory and prepaid items) and current liabilities of $37,000. What is the current ratio? What is the acid-test ratio? If the company borrows $17,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the acid-test ratio be? (Round an

(a) 2.62; 1.62

(b) 1.80; 1.11

Explanation:

Given that,

Current assets = $97,000 (of which Inventory and prepaid items = $37,000)

Current liabilities = $37,000

Current ratio = Current assets ÷ Current liabilities

                     = $97,000 ÷ $37,000

                     = 2.62

Acid test ratio:

= (Current assets - Inventory and prepaid expense) ÷ Current liabilities

= ($97,000 - $37,000) ÷ $37,000

= $60,000 ÷ $37,000

= 1.62

If the company borrows $17,000 cash from a bank on a 120-day loan.

Current liabilities = Old current liabilities + New current liabilities

                            = $37,000 + $17,000

                            = $54,000

Current ratio = Current assets ÷ Current liabilities

                     = $97,000 ÷ $54,000

                     = 1.80

Acid test ratio:

= (Current assets - Inventory and prepaid expense) ÷ Current liabilities

= ($97,000 - $37,000) ÷ $54,000

= $60,000 ÷ $54,000

= 1.11

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