Airline Accessories has the following current assets: cash, $107 million; receivables, $99 million; inventory, $187 million; and other current assets, $23 million. Airline Accessories has the following liabilities: accounts payable, $108 million; current portion of long-term debt, $40 million; and long-term debt, $28 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.)

1. Current ratio - 2.8 : 1

2. Acid - test ratio - 1.5 : 1

Explanation:

1. CURRENT RATIO

The current ratio is a liquidity ratio which shows how a company can settle its short term obligations (those due within an year). In other words, how a company can use its current assets to account for its current liabilities. Generally, a current asset ratio of 2 : 1 is seen as ideal. This is calculated by dividing current assets by current liabilities.

Current assets in this scenario:

Cash - $107 million

Receivables - $99 million

Inventory - $187 million

Other current assets - $23 million

Total current assets = $107m + $99m + $187m + $23m = $416m

Current liabilities in this scenario:

Accounts payable - $108 million

Current portion of long-term debt- $40 million

Total current liabilities = $108m + $40m = $148m

Hence, current asset ratio = $416m / $148m = 2.8

Current ratio = 2.8 : 1

2. ACID TEST RATIO

The acid test ratio is similar to current ratio, however is more precise. It is also known as the quick ratio and does not take into account current assets such as inventory which may be difficult to liquidate. Henceforth, it is seen as a more accurate form of the current ratio. An ideal acid test ratio is 1 : 1. It is calculated as (current assets - inventory) / current liabilities.

Current assets - $416m

Inventory - $187m

Current liabilities - 148m

Hence, acid test ratio = ($416m - $187m) / $148m = 1.5

Acid test ratio = 1.5 : 1

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