Final answer:
The firm's level of current liabilities is $1.6 million, and the firm's level of inventories is $1.12 million after applying the formulas for current ratio and quick ratio to the given values.
Step-by-step explanation:
To determine the firm's level of current liabilities and inventories given the current assets, current ratio, and quick ratio, we need to apply the definitions of these financial metrics.
The current ratio is calculated by dividing current assets by current liabilities. Given that Ace Industries has a current ratio of 2.5, we can establish the following equation:
Current Ratio = Current Assets / Current Liabilities
2.5 = $4 million / Current Liabilities
Current Liabilities = $4 million / 2.5
Current Liabilities = $1.6 million
Now, the quick ratio is calculated by subtracting inventories from current assets, then dividing by current liabilities. The quick ratio is given as 1.8, so we have:
Quick Ratio = (Current Assets - Inventories) / Current Liabilities
1.8 = ($4 million - Inventories) / $1.6 million
After solving for inventories, we get:
Inventories = $4 million - (1.8 * $1.6 million)
Inventories = $4 million - $2.88 million
Inventories = $1.12 million