Question

In its most recent annual report, Appalachian Beverages reported current assets of $70,300 and a current ratio of 1.90. Assume that the following transactions were completed:_________.

(1) purchased merchandise for $6,700 on account and (2) purchased a delivery truck for $10,000, paying $2,000 cash and signing a two-year promissory note for the balance.
Compute the updated current ratio (round answers to 2 decimal places)Transaction (1) ________________Transaction (2) ________________I am not sure how to do this problem, I understand how to general compute the current ration:________.Current raion= currenct assets/current liabilitiesbut how do you do compute an update?If someone could show me how to do this correctly, I will award them lifesaver.

Answer 1

Appalachian Beverages

With reported current assets of $70,300 and a current ratio of 1.90, one can work out the current liabilities from these two. The current liabilities are equal to $70,300/1.90 - $37,000. To work back, one can state that current ratio equals $70,300/$37,000 = 1.90.

Having ascertained the value of the former current liabilities, one can use the information to update the two parameters for calculating the current ratio as follows:

Current liabilities increased by $6,700 from purchase of merchandise on account and of a delivery truck by $8,000. So, the updated current liabilities equal to $37,000 + 6,700 + 8,000 = $51,700. Similarly, the current assets decreased by $2,000 for the part-payment for the delivery truck. Thus, current assets are now equal to $68,300 ($70,300 - 2,000).

Having updated the two parameters, one can then compute the updated current ratio as follows:

Current ratio = current assets/current liabilities = $68,300/$51,700 = 1.32.

Step-by-step explanation:

Appalachian Beverages' current ratio shows the relationship between current assets and current liabilities and the ability of the entity to settle current liabilities with current assets.