Question

Analysis of Liquidity

Based on the comparative income statement and balance sheet of Cowan Kitchen Counters, Inc., that follow:

Cowan Kitchen Counters, Inc. Comparative Income Statement For Years Ended December 31, 20-2 and 20-1
	20-2		20-1
Net Sales (all on account)		$2,570,800		$2,163,000
Cost of goods sold		1,884,000		1,628,000
Gross profit		$686,800		$535,000
Operating expenses		312,300		228,000
Other expense (interest)		24,200		24,200
Income tax expense		172,100		106,900
Net income		$178,200		$175,900

Cowan Kitchen Counters, Inc. Comparative Balance Sheet December 31, 20-2 and 20-1
	20-2		20-1
Cash		$254,600		$240,900
Government notes		249,600		249,600
Accounts receivable (net)		902,100		797,500
Merchandise inventory		985,700		915,000
Supplies and prepayments		145,400		48,900
Land		106,600		106,600
Building (net)		328,700		391,700
Office equipment (net)		17,600		14,400
Total assets		$2,990,300		$2,764,600
Current liabilities (accounts payable)		$698,800		$534,400
Bonds payable		220,000		240,000
Total liabilities		$918,800		$774,400
Common stock ($10 par, 180,000 shares)		$1,800,000		$1,800,000
Retained earnings		271,500		190,200
Total stockholders' equity		$2,071,500		$1,990,200
Total liabilities and stockholders' equity		$2,990,300		$2,764,600

Compute the following liquidity measures for 20-2 (round all calculations to two decimal places):

a. Quick or acid-test ratio		to 1
b. Current ratio		to 1
c. Working capital	$

Answer 1

A) Quick Ratio :

Quick Ratio = Liquid Assets / Current Liabilities, or

Quick Ratio = (Cash and Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

Quick Ratio = (254600+249600+902100)/698800 = 1406300/698800 =2.01 ( Round off)

B)  Current Ratio :

Current Ratio = Current assets / Current liabilities

Current ratio = (254600+249600+902100+985700+145400) / 698800

Current Ratio = 2537400 / 698800 = 3.63 ( Round off)

C)

Working capital :

Working capital = Current assets - current liabilities

Working capital = 2537400 - 698800 = $ 18,38,600