You are analyzing the company's ability to pay its short-term obligations, calculating the following things:
To calculate the liquidity ratios for Lucky 7, Inc., you will need the following information from the company’s balance sheet. You will be calculating the liquidity ratios for 2016.
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| 2016 | 2015 |
| Current assets: |
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|
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|
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Cash
| $35,000 | $14,500 |
|
Accounts receivable (net)
| $17,500 | $19,500 |
|
Inventory
| $59,000 | $42,000 |
|
Prepaid expenses
| $500 | $2,500 |
| Total current assets | $112,000 | $78,500 |
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|
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|
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| Current liabilities: |
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|
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|
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Accounts payable
| $27,000 | $22,500 |
|
Accrued liabilities
| $1,000 | $1,200 |
|
Income taxes payable
| $1,500 | $2,500 |
| Total current liabilities | $29,500 | $26,200 |
Working capital is a measure used to evaluate a business’s ability to meet its short-term obligations with current assets. Working capital is calculated as follows:
The current ratio is also a measure used to evaluate a business’s ability to meet its short-term obligations. The current ratio is calculated as follows:
The cash ratio is a measure used to evaluate a business’s ability to meet its short-term obligations using only cash and cash equivalents. The cash ratio is calculated as follows: Note: The cash ratio is not in the textbook.
The acid-test ratio is a measure used to evaluate whether a company can meet its short-term obligation using the only the most liquid of the current assets. The acid-test ratio is calculated as follows: