Question

Rocky Johnson just reported the following balance sheet for the end of 2023.

Know Your Role Boulevard, LLC

Assets:
Cash and Marketable Securities= $250,000
Accounts Receivable= $400,000
Inventory= $350,000.00
Total Current Assets= $1,000,000.00

Gross Fixed Assets= $5,000,000
Accumulated Depreciation= $2,225,000
Net Fixed Assets= $2,775,000

Total Assets= $3,775,000
Liabilities and Shareholder Equity
Accounts Payable= $325,000
Notes Payable= $600,000
Total Current Liabilities= $925,000.00
Long term Debt= $1,680,000
Total Liabilities= $2,605,000

Common Stock= $750,000
Retained Earnings= $420,000
Total Shareholder Equity= $1,170,000

Total Liabilities and Shareholder Equity= $3,775,000

Find the current ratio for the firm.

Answer 1

The current ratio is a measure of a firm's ability to cover its short-term liabilities with its short-term assets. It is calculated using the formula:

\[
\text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}}
\]

From the balance sheet provided for Know Your Role Boulevard, LLC:

- Total Current Assets = $1,000,000
- Total Current Liabilities = $925,000

Now plug in the values into the formula:

\[
\text{Current Ratio} = \frac{1,000,000}{925,000} \approx 1.081
\]

Therefore, the current ratio for the firm is approximately **1.08**. This means the firm has $1.08 in current assets for every $1.00 of current liabilities.

Answer 2

Find the quick ratio for the firm.

Answer 3

The quick ratio, also known as the acid-test ratio, is a measure of a firm's ability to meet its short-term obligations using its most liquid assets. It excludes inventory from current assets because inventory may not always be quickly converted into cash.

The formula for the quick ratio is:

\[
\text{Quick Ratio} = \frac{\text{Cash and Marketable Securities} + \text{Accounts Receivable}}{\text{Total Current Liabilities}}
\]

From the balance sheet provided for Know Your Role Boulevard, LLC:

- Cash and Marketable Securities = $250,000
- Accounts Receivable = $400,000
- Total Current Liabilities = $925,000

Now plug in the values into the quick ratio formula:

\[
\text{Quick Ratio} = \frac{250,000 + 400,000}{925,000}
\]

Calculating the numerator:

\[
\text{Quick Ratio} = \frac{650,000}{925,000} \approx 0.703
\]

Therefore, the quick ratio for the firm is approximately **0.70**. This indicates that the firm has $0.70 in liquid assets for every $1.00 of current liabilities.