Assume that the current ratio for Arch Company is 3.5, its acid-test ratio is 1.

Question

Assume that the current ratio for Arch Company is 3.5, its acid-test ratio is 1.5, and its working capital is $370,000. Answer each of the following questions independently, always referring to the original information.

a. How much does the firm have in current liabilities? (Do not round intermediate calculations.)

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 intermediate calculations.)

c. If the firm collects an account receivable of $114,000, what will its new current ratio and working capital be? (Round "Current ratio" to 1 decimal place.)

d. If the firm pays an account payable of $54,000, what will its new current ratio and working capital be? (Do not round intermediate calculations. Round "Current ratio" to 1 decimal place.)

e. If the firm sells inventory that was purchased for $50,000 at a cash price of $57,000, what will its new acid-test ratio be? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Explanation / Answer

a) Current ratio = Current assets/current liabilities = 3.5 Working capital = Current assets - Current liabilities = $370000 Let the current assets be 'x' and current liabilities be 'y' x-y = 370000 x/y = 3.5 x= 3.5y 3.5y-y = 370000 2.5y = 370000 y = 370000/2.5 = $148000 x = 370000+148000 = $518000 Current assets = $518000 Current liabilites = $148000 b) Acid test ratio = (current assets - Merchandise inventory)/Current liabilities = 1.5 1.5 = (518000-Merchandise inventory)/$148000 1.5*$148000 = 518000-Merchandise inventory Merchandise inventory = 518000-222000 = $296000 c) New current ratio and working capital will be same because increases and decreases the current assets by same amount (ie cash increases by $114000 & accounts receivable decreases by $114000) d) New current ratio and working capital will be same because increases and decreases the current assets by same amount (ie cash decreases by $54000 & accounts payable increases by $54000) e) New current assets = $518000+57000-50000 = $525000 New inventory = $296000-50000 = $256000 New acid test ratio = (525000-256000)/148000 = 1.82

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