A company’s trial balance included the following account balances: Accounts Payable $ 19,207 Accounts Receivable 81,336 Cash 73,324 Income Tax Payable 3,512 Inventory 25,816 Note Payable, due in two years 1,709 Equipment 54,128 Stockholders’ Equity 202,808 Supplies 5,512 Wages Payable 12,880 What is the amount of the current ratio? (Round your answer to 2 decimal places.)

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amcool amcool · Answer 1 · 2020-06-13T03:44:16+02:00

Answer:

5.22

Explanation:

The formula for calculating the current ratio is as follows:

Current ratio = Current assets / Current liabilities .......... (1)

From the question, we have:

Current assets = Accounts Receivable + Cash + Inventory + Supplies = $81,336 + $73,324 + $25,816 + $5,512 = $185,988.

Note: Equipment is not a current asset but a fixed asset.

Current liabilities = Accounts Payable + Income Tax Payable + Wages Payable = $19,207 + $3,512 + $12,880 = $35,599.

Note: Note Payable, due in two years is not a current liability but a long term liability since it is not payable within one year.

Substituting the values into equation (1) we have:

Current ratio = $185,988 / $35,599 = 5.22

The current ratio of 5.22 indicates that the company more than enough current assets, 5.22 times, to pay of its current liabilities.