Question

Selected comparative financial statements of Bluegrass Corporation follows:

BLUEGRASS CORPORATION

Comparative Balance Sheets

December 31, 2017, 2016, and 2015

2017 2016 2015

Assets

Current assets . . . . . . . . . . . . . . . . \( 54,860 \) 32,660 \( 36,300

Long-term investments . . . . . . . . 0 1,700 10,600

Plant assets, net . . . . . . . . . . . . . . 112,810 113,660 79,000

Total assets . . . . . . . . . . . . . . . . . . \)167,670 \(148,020 \)125,900

Liabilities and Equity

Current liabilities . . . . . . . . . . . . . . \( 22,370 \) 19,180 \( 16,500

Common stock . . . . . . . . . . . . . . . 46,500 46,500 37,000

Other paid-in capital . . . . . . . . . . . 13,850 13,850 11,300

Retained earnings . . . . . . . . . . . . 84,950 68,490 61,100

Total liabilities and equity . . . . . . . \)167,670 \(148,020 \)125,900

BLUEGRASS CORPORATION

Comparative Income Statements

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

2017 2016 2015

Sales . . . . . . . . . . . . . . . . . . . . . . \(198,800 \)166,000 \(143,800

Cost of goods sold . . . . . . . . . . . 108,890 86,175 66,200

Gross profit . . . . . . . . . . . . . . . . . 89,910 79,825 77,600

Selling expenses . . . . . . . . . . . . . 22,680 19,790 18,000

Administrative expenses . . . . . . 16,760 14,610 15,700

Total expenses . . . . . . . . . . . . . . 39,440 34,400 33,700

Income before taxes . . . . . . . . . . 50,470 45,425 43,900

Income taxes . . . . . . . . . . . . . . . . 6,050 5,910 5,300

Net income . . . . . . . . . . . . . . . . . \) 44,420 \( 39,515 \) 38,600

Required

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

Short answer

	2015	2016	2017
Current ratio	2.2 to 1	1.7 to 1	2.5 to 1

Step-by-step solution

Meaning of Current Ratio

A current ratio can be described as a liquidity measure that helps to estimate how quickly the company can convert its current assets into cash to settle the current debt.

Computation of Current Ratio

For 2015

$$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{ratio}\mathbf{}\mathbf{of}\mathbf{}\mathbf{2015}\mathbf{=}\frac{\mathbf{Current}\mathbf{}\mathbf{Assets}}{\mathbf{Current}\mathbf{}\mathbf{Liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{36}\mathbf{,}\mathbf{300}}{\mathbf{16}\mathbf{,}\mathbf{500}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{2}\mathit{t}\mathit{o}\mathbf{1} \end{gathered}$$

For 2016

$$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{ratio}\mathbf{}\mathbf{of}\mathbf{}\mathbf{2016}\mathbf{=}\frac{\mathbf{Current}\mathbf{}\mathbf{Assets}}{\mathbf{Current}\mathbf{}\mathbf{Liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{32}\mathbf{,}\mathbf{660}}{\mathbf{19}\mathbf{,}\mathbf{180}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{1}\mathbf{.}\mathbf{7}\mathit{t}\mathit{o}\mathbf{1} \end{gathered}$$

For 2017

$$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{ratio}\mathbf{}\mathbf{of}\mathbf{}\mathbf{2017}\mathbf{=}\frac{\mathbf{Current}\mathbf{}\mathbf{Assets}}{\mathbf{Current}\mathbf{}\mathbf{Liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{54}\mathbf{,}\mathbf{860}}{\mathbf{22}\mathbf{,}\mathbf{370}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{5}\mathit{t}\mathit{o}\mathbf{1} \end{gathered}$$

Ideal Current Ratio

The ideal current ratio is 2:1