Based on this information the current ratio would be: a. 2.89 b. 1.21 c. 1.96 d.

Question

Based on this information the current ratio would be:

a. 2.89
b. 1.21
c. 1.96
d. 1.05

Garland Company
Balance Sheet
Assets:
Cash and Marketable securities $500,000
Accounts Receivable 800,000
Inventories 1,350,000
Prepaid Expenses 50,000
Total current assets $2,700,000
Fixed assets 5,000,000
Less: accum. depr. $2,000,000
Net fixed assets $3,000,000
Total Assets $5,700,000

Liabilities
Accounts Payable $400,000
Notes Payable 900,000
Accrued Taxes 75,000
Total Current Liabilities $1,375,000
Long Term Debt 1,200,000
Owner's Equity 3,125,000
Total liabilities and owner's equity $5,700,000

Net Sales and All credit $8,000,000
Less Cost of Good Sold 3,500,000
Sell and Administrative Expense 2,000,000
Depreciation Expense 250,000
interest Expense 150,000
Earnings before taxes 2,100,000
Income taxes 700,000
Net income $1,400,000

Common Stock dividends $500,000
Common Shares outstanding $1,00,000

Explanation / Answer

The formula for calculating the current ratio is Current ratio = Total Current assets / Total Current liabilities According to the given information, Total current assets = $2,700,000 Total current liabilities = $1,375,000 Substituting the values in the above equation, we get Current ratio = $2,700,000 / $1,375,000 = 1.96 Therefore, the correct option is (c)1.96

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