Question

The balance sheet for Stud Clothiers is shown below. Sales for the year were \(2,400,000, with 90 percent of sales sold on credit.

Stud Clothier
Balance sheet 20X1
Assets		Liabilities and Equity
Cash	\)60,000	Account payable	\(220,000
Account receivable	240,000	Accrued taxes	30,000
Inventory	350,000	Bonds payable (long term)	150,000
Plant and equipment	410,000	Common stock	80,000
		Paid in capital	200,000
		Retained earnings	380,000
Total assets	\)1,060,000	Total LIbilities and Equity	$1,060,000

Compute the following:

a. Current ratio

Short answer

Current ratio of the stud clothier company is 2.6.

Step-by-step solution

Current assets

$\begin{array}{rcl}\mathrm{Current}\mathrm{assets}& =& \mathrm{Cash}+\mathrm{Accounts}\mathrm{receivable}+\mathrm{Inventory}\\ & =& \$60,000+\$240,000+\$350,000\\ & =& \$650,000\end{array}$

Current liabilities

$\begin{array}{rcl}\mathrm{Current}\mathrm{liabilities}& =& \mathrm{Accounts}\mathrm{payable}+\mathrm{Accrued}\mathrm{taxes}\\ & =& \$220,000+\$30,000\\ & =& \$250,000\end{array}$

Calculation of current ratio

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{assets}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$650,000}{\$250,000}\\ & =& 2.6\end{array}$