Question

Selected year-end financial statements of Overton Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31, 2016, were inventory, \(17,400; total assets, \)94,900; common stock, \(35,500; and retained earnings, \)18,800.)

OVERTON CORPORATION

Income Statement

For Year Ended December 31, 2017

Sales . . . . . . . . . . . . . . . . . \(315,500

Cost of goods sold . . . . . . 236,100

Gross profit . . . . . . . . . . . . 79,400

Operating expenses . . . . . 49,200

Interest expense . . . . . . . . 2,200

Income before taxes . . . . . 28,000

Income taxes . . . . . . . . . . . 4,200

Net income . . . . . . . . . . . . \) 23,800

OVERTON CORPORATION

Balance Sheet

December 31, 2017

Assets Liabilities and Equity

Cash . . . . . . . . . . . . . . . . . . . . . . . \( 6,100 Accounts payable . . . . . . . . . . . . . . . . . . . . \) 11,500

Short-term investments . . . . . . . . 6,900 Accrued wages payable . . . . . . . . . . . . . . . 3,300

Accounts receivable, net . . . . . . . 12,100 Income taxes payable . . . . . . . . . . . . . . . . 2,600

Notes receivable (trade)* . . . . . . . 3,000 Long-term note payable, secured

Merchandise inventory . . . . . . . . . 13,500 by mortgage on plant assets . . . . . . . . . 30,000

Prepaid expenses . . . . . . . . . . . . . 2,000 Common stock, \(5 par value . . . . . . . . . . . 35,000

Plant assets, net . . . . . . . . . . . . . . 73,900 Retained earnings . . . . . . . . . . . . . . . . . . . 35,100

Total assets . . . . . . . . . . . . . . . . . . \)117,500 Total liabilities and equity . . . . . . . . . . . . . . $117,500

* These are short-term notes receivable arising from customer (trade) sales.

Required

Compute the following:

(1) current ratio,

Round to one decimal place; for part 6, round to two decimals.

Short answer

The current ratio is computed as2.5

Step-by-step solution

Meaning of Current Ratio

The current ratio indicates the business's ability to use current assets in such a manner to pay off its current debts.

Step 2:Computation of current ratio

$$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Current}\mathbf{}\mathbf{Assets}}{\mathbf{Current}\mathbf{}\mathbf{Liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{43}\mathbf{,}\mathbf{600}}{\mathbf{\$}\mathbf{17}\mathbf{,}\mathbf{400}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{5} \end{gathered}$$

Computation of Current assets and liabilities

$$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{Assets}\mathbf{=}\mathbf{Cash}\mathbf{+}\mathbf{Short}\mathbf{}\mathbf{term}\mathbf{}\mathbf{Investments}\mathbf{+}\mathbf{Accounts}\mathbf{}\mathbf{ReceivablesNet}\mathbf{+}\mathbf{Notes}\mathbf{}\mathbf{Receivables}\mathbf{\left(}\mathbf{trade}\mathbf{\right)}\mathbf{+} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{Merchandise}\mathbf{}\mathbf{Inventory}\mathbf{+}\mathbf{Prepaid}\mathbf{}\mathbf{Expenses} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{100}\mathbf{+}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{900}\mathbf{+}\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{100}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{13}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{43}\mathbf{,}\mathbf{600} \end{gathered}$$

Thus, current assets are $43,600

$$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{Liabilities}\mathbf{=}\mathbf{Accounts}\mathbf{}\mathbf{Payable}\mathbf{+}\mathbf{Accrued}\mathbf{}\mathbf{Wages}\mathbf{}\mathbf{Payable}\mathbf{+}\mathbf{Income}\mathbf{}\mathbf{tax}\mathbf{}\mathbf{payable} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{11}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{300}\mathbf{+}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{600} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{17}\mathbf{,}\mathbf{400} \end{gathered}$$

Thus, current assets are $17,400