Question

Assume that the current ratio for Arch Company is 2.5, its acid-test ratio is 2.0, and its working capital is $330,000. Answer each of the following questions independently, always referring to the original information.

Required:

1. How much does the firm have in current liabilities? (Do not round intermediate calculations.)
2. 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.)
3. If the firm collects an account receivable of $116,000, what will its new current ratio and working capital be? (Round "Current ratio" to 1 decimal place.)
4. If the firm pays an account payable of $55,000, what will its new current ratio and working capital be? (Do not round intermediate calculations. Round "Current ratio" to 1 decimal place.)
5. If the firm sells inventory that was purchased for $50,000 at a cash price of $63,000, what will its new acid-test ratio be? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Answer 1

Part 1	Current Ratio =Current Assets / Current Liabilities
	Current Ratio = $330,000+Current Liabilities / Current Liabilities
	2.5 Current Liabilities =$330,000 + Current Liabilities
	1.5 Current Liabilities =$330,000
	Current Liabilities =$330,000 / 1.5 =$220,000
	Current Assets =$330,000 + $220,000 =$550,000
Part 2	Acid-test ratio =(Current Assets - Inventories) / Current Liabilities
	2.0 =($550,000 - Inventory) / $220,000
	Inventory =$550,000 - $440,000 =$110,000
Part 3	If it collects Accounts receivable of $116,000 then the revised Current Assets will be $434,000($550,000-$116,000)
	New Current Ratio =$434,000 / $220,000 =1.97
	New Acid-test ratio =($434,000 - $110,000) / $220,000 =1.47
Part 4	If it pays Accounts payable of $55,000 then the revised Current Liabilities will be $165,000($220,000-$55,000)
	New Current Ratio =$550,000 / $165,000 =3.33
	New Acid-test ratio =($550,000 - $110,000) / $165,000 =2.67
Part 5	New Current Ratio =($550,000-$50,000) / $220,000 =2.27
	New Acid-test ratio =($500,000 - $60,000) / $220,000 =2.00