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28 May, 01:35

The current asset section of Stibbe Pharmaceutical Company's balance sheet included cash of $37,000 and accounts receivable of $57,000. 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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  1. 28 May, 01:47
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    The ending balance in inventories is $ 23500 and total current liability is $ 47000

    Explanation:

    Given:

    Cash included in company's balance sheet, C = $ 37000

    Accounts receivables, AR = $ 57000

    Current ratio = 2.5

    Acid-test ratio = 2.0

    Now,

    The current ratio is given as:

    Current ratio = (C + AR + inventory) / current liabilities

    thus,

    on substituting the values, we get

    2.5 = ($ 37000 + $ 57000 + inventory) / current liabilities

    let the inventory be 'i'

    and the current liability be 'L'

    2.5 = (94000 + i) / L

    or

    2.5L - $ 94000 = i ... (1)

    also,

    Acid-test ratio is given as:

    Acid-test ratio = (C + AR) / current liabilities

    on substituting the values, we get

    2.0 = ($ 37000 + $ 57000) / current liabilities

    or

    2.0 = $ 94000 / L

    or

    L = $ 47000

    Substituting the value of current liability in equation (1), we have

    i = 2.5 * $ 47000 - $ 94000

    or

    i = $ 23500

    Hence,

    the ending balance in inventories is $ 23500 and total current liability is $ 47000
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