Summary Business Accounting

Question:

The current asset section of Stibbe Pharmaceutical Company’s balance sheet included cash of $20,000

and accounts receivable of $40,000. The only other current asset is inventories. The company’s current

ratio is 2.0 and its acid-test ratio is 1.5. Determine the ending balance in inventories and total current

liabilities.



Answer:



Acid-test ratio = (Cash + Short-term investments + A/R)  Current liabilities

1.5 = ($20,000 + 0 + 40,000)  Current liabilities

1.5 x Current liabilities = $60,000

Current liabilities = $60,000  1.5

Current liabilities = $40,000



Current ratio = Current assets  Current liabilities

2.0 = Current assets  $40,000

Current assets = $40,000 x 2.0

Current assets = $80,000

$80,000 – 20,000(cash) – 40,000(A/R) = $20,000 inventories