Final answer:
Bauman, LLC has a current ratio of approximately 3.12 and an acid-test ratio of approximately 0.86, showing the company has more than enough current assets to cover its current liabilities, but less liquidity when inventory and prepaid expenses are excluded.
Step-by-step explanation:
The current ratio and acid-test ratio are financial metrics used to assess a company's short-term liquidity and its ability to pay off its current liabilities without relying on the sale of inventory. To calculate the current ratio, you divide total current assets by total current liabilities. The acid-test ratio (or quick ratio) is calculated by subtracting inventory from current assets, then dividing by current liabilities, excluding less liquid assets.
Calculation of the Current Ratio:
Total Current Assets = Cash + Short-term Investments + Accounts Receivable + Inventory + Prepaid Expenses = $45,680 + $10,000 + $42,500 + $245,000 + $14,320 = $357,500
Total Current Liabilities = Accounts Payable + Other Current Payables = $90,700 + $23,800 = $114,500
Current Ratio = Total Current Assets / Total Current Liabilities = $357,500 / $114,500 ≈ 3.12
Calculation of the Acid-Test Ratio:
Adjusted Current Assets (for Acid-Test) = Total Current Assets - Inventory - Prepaid Expenses = $357,500 - $245,000 - $14,320 = $98,180
Acid-Test Ratio = Adjusted Current Assets / Total Current Liabilities = $98,180 / $114,500 ≈ 0.86
The current ratio of Bauman, LLC is approximately 3.12, indicating that the company has $3.12 of current assets for every $1 of current liabilities. The acid-test ratio is approximately 0.86, which suggests that even without its inventory and prepaid expenses, the company has $0.86 of liquid assets for every $1 of current liabilities.