Question

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As a consultant for Acme Engineering you have been able to establish the following parameters from their Financial Statements:

Item

Amount

Cash

$200,000

Securities

$90,000

Accounts Receivable

$300,000

Inventories

$400,000

Prepaid Expenses

$16,000

Accounts Payable

$630,000

Other Liabilities

$180,000

Calculate the following parameters:

Total Assets

Total Liabilities

Working Capital

Current Ratio

Acid Test Ratio

Answer 1

Now Let us First Note down all the parameters and classify them as assets and Liabilities:-

Cash	$ 200000	Asset (Current Asset)
Securities	$ 90000	Asset (Current Asset)
Accounts Receivable	$ 300000	Asset (Current Asset)
Inventories	$ 400000	Asset (Current Asset)
Prepaid Expenses	$ 16000	Asset (Current Asset)
Accounts Payable	$ 630000	Liabilities (Current Liabilities)
Other Liabilities	$ 180000	Liabilities (Current Liabilities)

Therefore we have Total Assets (A)= Cash + Securities + Accounts Receivable + Inventories + Prepaid Expenses

Total Assets = $ 200000 + $ 90000 + $ 300000 + $ 400000 + $ 16000

Total Assets (A) = $ 1006000

And Now We have total Liabilities = Accounts Payable + Other Liabilities

Total Liabilities (B) = $ 630000 + $ 180000

Total Liabilities (B) = $ 810000

Now Working Capital = Current Asset - Current Liability

Now Working Capital = A - B = $ 1006000 - $ 810000

Now Working Capital = $ 196000

Now Current Ratio = Current Asset / Current Liability = A / B

Current Ratio = $ 1006000 - $ 810000

Current Ratio = 1.242

Now Acid Test Ratio = Quick Assets/ Current Liabilities

Now Quick Asset = (Total Current Asset - Inventory - Prepaid Expenses)/ Total Current Liability

Therefore Acid Test Ratio = ($ 1006000 - $ 400000 - $ 16000) / $ 810000

Acid Test Ratio = 0.7284