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Practice Problem 3

The balance sheet for Lucky 7, Inc. for 2015 and 2016 is shown below:

Lucky 7, Inc.
Comparative Balance Sheets (partial)
December 31, 2016 and 2015
-	2016	2015
Current assets:	-	-
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
-	-	-
Current liabilities:	-	-
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

Compute the following ratios for 2015:

working capital,
current ratio,
cash ratio, and
acid-test ratio.

Working Capital

Working capital = Current assets - Current liabilities

working capital (2015) = current assets (2015) - current liabilities (2015)
working capital = $78,500 - $26,200
working capital = $52,300

Current Ratio

Current ratio = \frac{Current assets}{Current liabilities}

current ratio (2015) = current assets (2015) / current liabilities (2015)
current ratio = $78,500 / $26,200
current ratio = 3.00 times

Cash Ratio

Cash ratio = \frac{Cash + Cash equivalents}{Current liabilities}

cash ratio (2015) = cash and cash equivalents (2015) / current liabilities (2015)
cash ratio = $14,500 / $26,200
cash ratio = 0.55 times

Acid-Test Ratio

Acid-test ratio = \frac{Cash + Short-term investments + Net current receivables}{Current liabilities}

acid-test ratio (2015) = (cash + short-term investments + net current receivables (2015))/ current liabilities (2015)
acid-test ratio = ($14,500 + $0 + $19,500) / $26,200
acid-test ratio = 1.30 times

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