Assume that the current ratio for Arch Company is 3.0, its acid-test ratio is 1.5, and its working capital is $310,000. Answer each of the following questions independently, always referring to the original information.
a) How much does the firm have in current liabilities?
b) If the only current assets shown on the balance sheet for Arch Company are Cash, Accounts Receivable, and Merchandise Inventory, then how much does the firm have in Merchandise Inventory?
c) If the firm collects an account receivable of $108,000, then what will its new current ratio and working capital be?
d) If the firm pays an account payable of $57,000, then what will its new current ratio and working capital be?
e) If the firm sells inventory that was purchased for $50,000 at a cash price of $65,000, then what will its new acid-test ratio be?

a) $155,000

b) $232,500

c) current ratio = 3, working capital = $310,000

d) current ratio = 4.16, working capital = $310,000

e) 1.92

Explanation:

current ratio = current assets / current liabilities = 3

acid test ratio = (current assets - inventory) / current liabilities = 1.5

working capital = current assets - current liabilities = $310,000

a) current liabilities = current assets - $310,000

3 = current assets / (current assets - $310,000)

3 current assets - $930,000 = current assets

2 current assets = $930,000

current assets = $465,000

current liabilities = $465,000 - $310,000 = $155,000

b) current liabilities = current assets / 3

current liabilities = (current assets - merchandise inventory) / 1.5

current assets / 3 = (current assets - merchandise inventory) / 1.5

current assets = 2 current assets - 2 merchandise inventories

current asset = 2 merchandise inventories

$465,000 = 2 merchandise inventories

merchandise inventory = $232,500

c) nothing changes, since a current asset is replaced by another current asset

d) $408,000 / $98,000 = 4.16

e) $297,500 / $155,000 = 1.92

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