Evaluation of current ratio and acid test ratio

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Reference no: EM1315943

Calculation of Current ratio and Acid test ratio.

Utilizing the attached Enclosure 1 "Balance Sheet and Income Statement for Spectrum, Inc"

ENCLOSURE 1

Spectrum, Inc. BALANCE SHEET (000)

Cash

$500

Accounts receivable

1,500

Inventories

500

Current assets

2,500

Net fixed assets

5,000

Total Assets

$7,500.00

 


Accounts payable

1,200

Bank note

300

Total current liabilities

1,500

Long term debt

4,000

Common stock

300

Retained earnings

1,700

Total liabilities and owner's equity

$7,500

 

Spectrum, Inc. INCOME STATEMENT (000)

Net sales

$8,500

Cost of goods sold

3,400

Gross profit

5,100

Operating expenses

2,900

Net operating income

2,200

Interest expense

580

Earnings before taxes

1,620

Income tax (34%)

551

Net income

$1,069

a) Compute the following ten (10) financial ratios and provide a one sentence explanation of the analytic use of each ratio test. Show your formulas and input. Accuracy to two decimal points is sufficient.
b) Evaluate how Spectrum's financial performance compares to their Industry for each calculated ratio. It is sufficient to rate each ratio as "G"= good, "S" = satisfactory, or "P" = poor.

 

Industry Norms

Current ratio

1.5

Acid test ratio

1.06

 

Reference no: EM1315943

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