Question

Airline Accessories has the following current assets: cash, $101 million; receivables, $93 million; inventory, $181 million; and other current assets, $17 million. Airline Accessories has the following liabilities: accounts payable, $96 million; current portion of long-term debt, $34 million; and long-term debt, $22 million. Based on these amounts, calculate the current ratio and the acid-test ratio for Airline Accessories. (Enter your answers in millions, not in dollars. For example, $5,500,000 should be entered as 5.5.)

Answer 1

Current Ratio = 3.02

Acid test Ratio = 1.62

Step-by-step explanation:

The current ratio is a measure to assess the liquidity situation of a company. It tells us the amount of current assets available to settle each $1 of current liability. The current liabilities are all the liabilities that are due within a year.

Current Assets = 101 + 93 + 181 + 17 = $392 million

Current Liabilities = 96 + 34 = $130 million

Current Ratio = Current Assets / Current liabilities

Current Ratio = 392 / 130 = 3.015 rounded off to 3.02

The acid test ratio is also a measure of checking the liquidity of a company. However, this ratio measures the amount of most liquid current assets available to settle each $1 of current liability. This excludes inventory from the current assets.

Acid test ratio = (Current assets - Inventory) / Current Liabilities

Acid test ratio = (392 - 181) / 130 = 1.62