Question

The following information was drawn from the balance sheets of the Kansas and Montana companies: Kansas Montana Current assets $ 59,000 $ 78,000 Current liabilities 40,000 43,000 Required a. Compute the current ratio for each company. b. Which company has the greater likelihood of being able to pay its bills? c. Assume that both companies have the same amount of total assets. Speculate as to which company would produce the higher return-on-assets ratio.

Answer 1

a) Current ratio for Kansas company is 1.475

Current ratio for Montana company is 1.814

b) Since the current ratio for the Montana company is more than that of the Kansas company which shows better liquidity, the Montana company has the greater likelihood of being able to pay its bills.

c) Kansas company would produce the higher return-on-assets ratio.

Step-by-step explanation:

Current Assets Current liabilities

Kansas Company $ 59,000 $ 40,000

Montana Company $ 78,000 $ 43,000

a) To calculate the current ratio of A company

Current ratio =
`(Current Assets)/(Current Liabilities)`

Therefore current ratio for Kansas company = $ 59,000 ÷ $ 40,000 = 1.475

Current ratio for Montana company = $ 78,000 ÷ $ 43,000 = 1.814