Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5, and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s level of inventories?

Answer 1

To find the firm’s current liabilities and level of inventories, we can use the current ratio and the quick ratio.

Definitions:

1. Current Ratio: This is defined as current assets divided by current liabilities. \[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \]

2. Quick Ratio: This is defined as (Current Assets - Inventories) divided by Current Liabilities. \[ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}} \]

Given data:

• Current Assets (CA) = $3,000,000
• Current Ratio = 1.5
• Quick Ratio = 1.0

Step 1: Calculate Current Liabilities

Using the current ratio formula:

\[ 1.5 = \frac{3,000,000}{\text{Current Liabilities}} \]

Let \( CL \) be the current liabilities. We can rearrange this equation:

\[ CL = \frac{3,000,000}{1.5} = 2,000,000 \]

Step 2: Calculate Inventories

Using the quick ratio formula:

\[ 1.0 = \frac{3,000,000 - \text{Inventories}}{2,000,000} \]

Again, let \( I \) be the level of inventories. Rearranging the quick ratio equation gives:

\[ 2,000,000 = 3,000,000 - I \]

Now solving for \( I \):

\[ I = 3,000,000 - 2,000,000 = 1,000,000 \]

Summary of Results:

• Current Liabilities = $2,000,000
• Inventories = $1,000,000