Assume that the current ratio for Arch Company is 3.0, its acid-test ratio is 2.
ID: 2469744 • Letter: A
Question
Assume that the current ratio for Arch Company is 3.0, its acid-test ratio is 2.0, and its working capital is $400,000. Answer each of the following questions independently, always referring to the original information.
Required:
A. How much does the firm have in current liabilities? (Round your final answer to nearest whole dollar.)
B. If the only current assets shown on the balance sheet for Arch Company are Cash, Accounts Receivable, and Merchandise Inventory, how much does the firm have in Merchandise Inventory? (Do not round your intermediate calculations and round your final answer to nearest whole dollar.)
C. If the firm collects an account receivable of $114,000, what will its new current ratio and working capital be? (Round ratio answer to 1 decimal place.)
D. If the firm pays an account payable of $58,000, what will its new current ratio and working capital be? (Do not round your intermediate calculations and round ratio answer to 1 decimal place.)
E. If the firm sells inventory that was purchased for $50,000 at a cash price of $64,000, what will its new acid-test ratio be? (Do not round your intermediate calculations and round ratio answer to 1 decimal place.)
Explanation / Answer
Answer A. Current ratio = 3
or, Current asset/Current liabilities = 3
Current assets = 3 Current liabilities
Working Capital = Current assets - Current liabilities
400000 = 3 Current Liabilities - Current Liabilities
400000 = 2 Current liabilities
Current Liabilities = 200000
Answer B. current Asset = 3 Current liabilities
= 3 * 200000
= 600000
Acid Test Ratio = 2
(Current Asset - Inventory)/Current liabilities = 2
(600000 - Inventory)/200000 = 2
Inventory = 200000
Answer C. There will be no change in Working capital and Current ratio as with the receipt of accounts receivables Cash will be received. So where on one hand current asset is decreased on account of accounts receivables, current asset is increased in the form of cash. So Current assets will be same even after the receipt of accounts receivable, Current ratio and working capital will remain same
Answer D. Revised Curret Assets = 600000 - 58000 = $542000 (Cash is paid so current assets will be decreased)
Revised Current Liabilities = 200000 - 58000 = $142000 (liabilities have been paid off so it will be decreased)
Revised Working capital = 542000 - 142000
= $400000
Current Ratio = 542000/142000
= 3.8
Answer E. Revised Current assets = 600000 - 50000+64000
=$614000
Revised Inventory = $200000 -50000
= $150000
Acid test ratio = (614000 - 150000)/200000
= 2.32 or 2.3
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