USA: +1 (725) 712-1730 
Sign in
E2-14 Calculating and Evaluating the Current Ratio
Columbia Sportswear Company reported the following in recent balance sheets (amounts in thousands).
Required:
1. Calculate the current ratio at September 30, 2013 and December 31, 2012.
2. Did the company’s current ratio increase or decrease? What does this imply about the company’s ability to pay its current liabilities as they come due?
3. What would Columbia’s current ratio have been on September 30, 2013, if the company were to have paid down $10,000 of its Accounts Payable? Does paying down Accounts Payable in this case increase or decrease the current ratio?
4. Are the company’s total assets financed primarily by liabilities or stockholders’ equity at September 30, 2013?
September 30, 2013 December 31,2012 Assets Current Assets 274,200 29,000 378,000 410,100 88,900 1,180,200 73,400 280,700 $1,534,300 $ 290,800 44,700 334,300 363,300 89,500 1,122,600 75,800 260,500 $1,458,900 Cash Short-term Investments Accounts Receivable Inventory Prepaid Rent Total Current Assets Software Equipment Total Assets Liabilities and Shareholder’s Equity Liabilities Current Liabilities Accounts Payable $ 261,400 0 9,300 270,700 43,800 314,500 S 247,400 200 4,500 252,100 40,600 292.700 Notes Payable (short-term) Income Tax Payable Total Current Liabilities Notes Payable (long-term) Total Liabilities Stockholders’ Equity Common Stock Retained Earnings Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity 44,400 1,175,400 1,219,800 $1,534,300 24,800 1,141,400 I , I 66,200 $1,458,900
Expert Answer
1.
Current ratio = Total current assets / Total current liabilities
Current ratio at September 30, 2013 = $1,180,200/$270,700 = 4.36
Current ratio at December 31, 2012 = $1,122,600/$252,100 = 4.45
2.
Company’s current ratio has decreased which implies that the ability of the company to pay its current liabilities has reduced.
3.
Revised current ratio = ($1,180,200-$10,000)/($270,700-$10,000) = 4.49
Paying down the accounts payable has increased the current ratio
4.
Total liabilities = $314,500
Total stockholders’ equity = $1,219,800
Hence, the total assets are primarily financing by stockholders’ equity.
