Assume that the current ratio for Arch Company is 3.0, its acid-test ratio is 2.

Question

Assume that the current ratio for Arch Company is 3.0, its acid-test ratio is 2.0, and its working capital is $340,000. Answer each of the following questions independently, always referring to the original information.

d.If the firm pays an account payable of $57,000, what will its new current ratio and working capital be? (Do not round your intermediate calculations and round ratio answer to 1 decimal place.)     

If the firm sells inventory that was purchased for $50,000 at a cash price of $61,000, what will its new acid-test ratio be? (Do not round your intermediate calculations and round ratio answer to 1 decimal place.)

If the firm sells inventory that was purchased for $50,000 at a cash price of $61,000, what will its new acid-test ratio be? (Do not round your intermediate calculations and round ratio answer to 1 decimal place.)

Explanation / Answer

Statement showing computations Particulars Amount Working Capital = CA- CL = 340,000 Current Ratio = Current Assets /Current Liab = 3 CA = 3CL 3CL - CL = 340,000 CL = 170,000 CA = 3*170,000 = 510,000 Quick Assets = 2*CL = 2*170,000 = 340,000 Inventory =CA - QA = 510,000 - 340,000 = 170,000 d) IF AP of 57,000 is paid then CA = 510 ,000 - 57,000         453,000.00 CL = 170,000 - 57,000         113,000.00 New Current ratio = 453,000/ 113,000                      4.01 WC = 453,000 - 113,000         340,000.00 e) New Quick Assets = 340,000 + 61,000         401,000.00 Acid Test ratio = 401,000/170,000                      2.36

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