Question

The following balance sheet information is provided for Duke Company for Year 2: Assets Cash $ 5,400 Accounts receivable 15,500 Inventory 18,000 Prepaid expenses 1,600 Plant and equipment, net of depreciation 20,200 Land 19,950 Total assets $ 80,650 Liabilities and Stockholders' Equity Accounts payable $ 4,500 Salaries payable 11,500 Bonds payable (Due in ten years) 19,000 Common stock, no par 30,000 Retained earnings 15,650 Total liabilities and stockholders' equity $ 80,650 What is the company's current ratio?

Answer 1

Answer: 2.52

Explanation: Current ratio is a liquidity ratio that is used by analyst to evaluate whether the subject firm has enough resources to meet its short term nature obligations. It is computed by using following formula :-

$Current\:ratio=\:\frac{current\:assets}{current\:liabilities}$

where,

current assets = $5400 + $15,500 + $18,000 + $1600 = $40,500

current liabilities = $4500 + $11,500 = $16,000

putting the values into equation we get :-

$Current\:ratio=\:\frac{\ 40,500}{\ 16,000}$

= 2.52