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The current asset section of Stibbe Pharmaceutical Company’s balance sheet included cash of $25,000 and accounts receivable of $45,000. The only other current asset is inventories. The company’s current ratio is 2.5 and its acid-test ratio is 2.0.
Determine the ending balance in inventories and total current liabilities.
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Question & Answer: The current asset section of Stibbe Pharmaceutical Company’s balance sheet included cash of $25,000 and accounts receiv…..
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Expert Answer
Current ratio=Current assets/Current liabilities
2.5*Current liabilities=(Cash+Accounts receivable+Inventories)
2.5Current liabilities=(25000+45000+Inventories)
Hence
2.5Current liabilities=70000+Inventories
Acid test ratio=(Current assets-inventories)/Current liabilties
2=($25000+$45000)/Current liabilities
Hence current liabilities=(70000/2)=$35000.
Hence inventories=(2.5*Current liabilities)-70,000=(2.5*35000)-70,000
=$17500.
