Question

Simon Company's year-end balance sheets follow.

At December 31 2017 2016 2015
Assets
Cash $ 27,286 $ 32,545 $ 34,254
Accounts receivable, net 79,083 58,094 45,211
Merchandise inventory 98,417 76,014 49,629
Prepaid expenses 9,056 8,629 3,960
Plant assets, net 258,067 231,536 216,446
Total assets $ 471,909 $ 406,818 $ 349,500
Liabilities and Equity Accounts payable $ 119,855 $ 67,377 $ 47,057
Long-term notes payable secured by mortgages on plant assets 86,945 96,375 75,695
Common stock, $10 par value 163,500 163,500 163,500
Retained earnings 101,609 79,566 63,248
Total liabilities and equity $ 471,909 $ 406,818 $ 349,500
Required:
1. Compute the current ratio for the years ended December 31, 2017, 2016 and 2015.
2. Compute the acid-test ratio for the years ended December 31, 2017, 2016 and 2015.

Answer 1

1) current ratio = current assets / current liabilities

current assets include cash + accounts receivable + prepaid expenses + inventory

current liabilities include liabilities and equity amounts payable

• current ratio 2015 = ($34,254 + $45,211 + $49,629 + $3,960) / $47,057 = 2.83
• current ratio 2016 = ($32,545 + $58,094 + $76,014 + $8,629) / $67,377 = 2.60
• current ratio 2017 = ($27,286 + $79,083 + $98,417 + $9,056) / $119,855 = 1.78

2) acid test ratio = (current assets - inventory) / current liabilities

• acid test ratio 2015 = ($34,254 + $45,211 + $3,960) / $47,057 = 1.77
• acid test ratio 2016 = ($32,545 + $58,094 + $8,629) / $67,377 = 1.47
• acid test ratio 2017 = ($27,286 + $79,083 + $9,056) / $119,855 = 0.96