Skysong, Inc. had the following transactions involving current assets and current liabilities during February 2020. Feb. 3 Collected accounts receivable of $14,400. 7 Purchased equipment for $42,600 cash. 11 Paid $4,600 for a 1-year insurance policy. 14 Paid accounts payable of $14,000. 18 Declared cash dividends, $4,900. Additional information: As of February 1, 2020, current assets were $139,100 and current liabilities were $34,200. Compute the current ratio as of the beginning of the month and after each transaction.

Current Ratios

At beginning of the month = 4.067

Feb 3 = 4.067

Feb 7 = 2.8216

Feb 11 = 2.8216

Feb 14 = 4.084

Feb 18 = 4.084

Explanation:

The current ratio is a metric to assess the liquidity of a business. It tells us about how much of current assets are available to pay off each $1 of current liability. The current ratio is calculated as follows,

Current ratio = Current assets / Current Liabilities

Current Ratios

At beginning of the month = 139100 / 34200

At beginning of the month = 4.067

Feb 3 = 139100 / 34200

Feb 3 = 4.067

A collection of accounts receivables simply transfers the amount from accounts receivables to cash and the total current assets remain same.

Feb 7 = (139100 - 42600) / 34200

Feb 7 = 2.8216

A purchase of fixed asset using cash reduces cash account and thus the value of current assets.

Feb 11 = 96500 / 34200

Feb 11 = 2.8216

A prepaid insurance for one year is a current asset and a purchase of one year insurance in advance simply transfers amount from cash to prepaid insurance account and the current assets remain same.

Feb 14 = (96500 - 14000) / (34200 - 14000)

Feb 14 = 4.084

A payment of accounts payable reduces the current assets of cash while also reducing the current liability by the same amount.

Feb 18 = 82500 / 20200

Feb 18 = 4.084

A declaration of dividends does not reduce current assets. The current assets are reduced when cash is paid.

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