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.

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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