The Robinson Company has the following current assets and current liabilities fo

Question

The Robinson Company has the following current assets and
current liabilities for these two years:
2011 2012
Cash and marketable securities $50,000 $50,000
Accounts receivable 300,000 350,000
Inventories 350,000 500,000
Total current assets $700,000 $900,000
Accounts payable $200,000 $250,000
Bank loan 0 150,000
Accruals 150,000 200,000
Total current liabilities $350,000 $600,000
a. Compare the current ratios between the two years.
b. Compare the acid-test ratios between 2011 and 2012.
Comment on your findings.

Explanation / Answer

sol current ratio = current assets / current liabilities current ratio = 700,000 / 350,000 for 1 year (2011) and 900,000 / 600,000 for the 2nd year (2012) if it's greater than 1 and getting larger then you have more assets than liabilities and you can pay short term creditors and that's a good thing.. acid test ratio = cash and marketable securities + Accounts Receivable / liabilities so acid test ratio = (50,000 + 300,000 ) / $350,000 for 2011 then you want this over 1 for better and more stable companies. You don't include inventory on acid test ratio. Acid test ratio's are more strict b/c Inventory may or may not turn over.

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