Question

Question: 13-17 (L04) (Ratio Computations and Discussion) Sprague Company has been operating for several years, and on December 31, 2017, presented the following balance sheet.

SPRAGUE COMPANY
BALANCE SHEET
DECEMBER 31, 2017
Cash	\(40,000	Accounts payable	\)80,0000
Receivables	\(75,0000	Mortgage payable	\)140,000
Inventory	\(95,000	Common stock (\)1 par)	\(150,000
Plant assets (net)	\)220,000	Retained earnings	\(60,000
	\)430,000		\(430,000

The net income for 2017 was \)25,000. Assume that total assets are the same in 2016 and 2017.

Instructions

Compute each of the following ratios. For each of the four, indicate how it is computed and its significance as a tool in the analysis of the financial soundness of the company.

(a) Current ratio. (C) Debt to assets ratio.

(b) Acid-test ratio. (d) Return on assets.

Short answer

Answer (a)

(a) The current ratio is 0.95.

(b) The Acid Test ratio is 0.52.

(c)The debt to asset ratio is 0.51.

(d) The return on assets is 5.81%.

Step-by-step solution

Definition of Acid Test Ratio

The acid test ratio is a more liquid ratio it helps in measuring the ability of the company in paying short-term debt out of liquid assets like cash or quick assets. A higher acid test ratio is desired.

(a) Current Ratio  

Particulars	Amount $
Current Assets($40,000+$75,000+$95,000)	$210,000
Current Liabilities($80,000+$140,000)	$220,000
Current Ratio($210,000 /$220,000)	0.95

(b) Acid Test Ratio

Particulars	Amount $
Liquid Assets ($40,000+$75,000)	$115,000
Current Liabilities ($80,000+$140,000)	$220,000
Acid Test Ratio($115,000 /$220,000)	0.52

(c) Debt to Asset Ratio

Particulars	Amount $
Total Debet ($80,000+$140,000)	$220,000
Total Assets	$430,000
Debt to Asset Ratio ($220,000 /$430,000)	0.51

(d) Return on Assets

Particulars	Amount $
Net Income	$25,000
Total Assets	$430,000
Return on Asset ($25,000 /$430,000)	5.81%