Question

Selected comparative financial statements of Korbin Company follow.

KORBIN COMPANY

Comparative Income Statements

For Years Ended December 31, 2017, 2016, and 2015

2017 2016 2015

Sales . . . . . . . . . . . . . . . . . . . . . . \(555,000 \)340,000 \(278,000

Cost of goods sold . . . . . . . . . . . 283,500 212,500 153,900

Gross profit . . . . . . . . . . . . . . . . . 271,500 127,500 124,100

Selling expenses . . . . . . . . . . . . . 102,900 46,920 50,800

Administrative expenses . . . . . . 50,668 29,920 22,800

Total expenses . . . . . . . . . . . . . . 153,568 76,840 73,600

Income before taxes . . . . . . . . . . 117,932 50,660 50,500

Income taxes . . . . . . . . . . . . . . . . 40,800 10,370 15,670

Net income . . . . . . . . . . . . . . . . . \) 77,132 \( 40,290 \) 34,830

KORBIN COMPANY

Comparative Balance Sheets

December 31, 2017, 2016, and 2015

2017 2016 2015

Assets

Current assets . . . . . . . . . . . . . . . . \( 52,390 \) 37,924 \( 51,748

Long-term investments . . . . . . . . 0 500 3,950

Plant assets, net . . . . . . . . . . . . . . 100,000 96,000 60,000

Total assets . . . . . . . . . . . . . . . . . . \)152,390 \(134,424 \)115,698

Liabilities and Equity Current liabilities . . . . . . . . . . . . . . \( 22,800 \) 19,960 \( 20,300

Common stock . . . . . . . . . . . . . . . 72,000 72,000 60,000

Other paid-in capital . . . . . . . . . . . 9,000 9,000 6,000

Retained earnings . . . . . . . . . . . . 48,590 33,464 29,398

Total liabilities and equity . . . . . . . \)152,390 \(134,424 \)115,698

Required

1. Compute each year’s current ratio. (Round ratio amounts to one decimal.)

Short answer

	2015	2016	2017
Current ratio	2.5 to 1	1.9 to 1	2.3 to 1

Step-by-step solution

Meaning of Current Assets

Current assets are the company assets that the company wants to hold for less than a year—for example, inventory.

Step 2:Computation of Current Ratio

For 2015

$$\begin{gathered} \mathbf{\text{Currentratioof2015}}\mathbf{=}\frac{\mathbf{\text{CurrentAssets}}}{\mathbf{\text{CurrentLiabilities}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{51}\mathbf{,}\mathbf{748}}{\mathbf{20}\mathbf{,}\mathbf{300}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{5}\mathbf{}\mathbf{\text{to}}\mathbf{}\mathbf{1} \end{gathered}$$

For 2016

role="math" localid="1663178607529" $$\begin{gathered} \mathbf{\text{Currentratioof}}\mathbf{2016}\mathbf{=}\frac{\mathbf{\text{CurrentAssets}}}{\mathbf{\text{CurrentLiabilities}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{37}\mathbf{,}\mathbf{924}}{\mathbf{19}\mathbf{,}\mathbf{960}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{1}\mathbf{.}\mathbf{9}\mathbf{}\mathbf{\text{to}}\mathbf{}\mathbf{1} \end{gathered}$$

For 2017

$$\begin{gathered} \mathbf{\text{Currentratioof}}\mathbf{2017}\mathbf{=}\frac{\mathbf{\text{CurrentAssets}}}{\mathbf{\text{CurrentLiabilities}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{52}\mathbf{,}\mathbf{390}}{\mathbf{22}\mathbf{,}\mathbf{800}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{3}\mathbf{}\mathbf{\text{to}}\mathbf{}\mathbf{1} \end{gathered}$$

Explanation about current ratio

Generally, companies consider 2:1 as an excellent current ratio, so in this case, the Korbin company has an almost nearby this ratio all the years. It can be judged as a reasonable credit risk in the short run.