6TI - Horngren'S Financial And Managerial Accounting

Question

Benson Auto Repair has the following account balances at December 31, 2018, from its adjusted trial balance. Compute

Benson Auto Repair’s current ratio.

Cash \( 4,000 Common Stock \) 20,000

Accounts Receivable 3,200 Retained Earnings 15,700

Prepaid Rent 1,900 Dividends 2,100

Office Supplies 3,000 Service Revenue 1,600

Equipment 34,800 Depreciation Expense—Equipment 300

Accumulated Depreciation—Equipment 1,600 Salaries Expense 800

Accounts Payable 5,400 Rent Expense 500

Notes Payable (long-term) 7,000 Utilities Expense 600

Supplies Expense 100

Step-by-Step Solution

Answer

The current ratio equals 2.24.

Explanation on Current Ratio

Current ratio measures the financial ability to repay the current obligations (liabilities) by utilizing the current assets.

Calculation of Current Ratio

Current ratio is calculated as follows: 

$\begin{array}{rcl}\mathbf{CurrentRatio}& \mathbf{=}& \frac{\mathbf{TotalCurrentAssets}}{\mathbf{TotalCurrentLiabilities}}\\ & \mathbf{=}& \frac{\mathbf{Cash}\mathbf{+}\mathbf{AcountsReceivable}\mathbf{+}\mathbf{PrepaidRent}\mathbf{+}\mathbf{OfficeSupplies}}{\mathbf{AccountsPayable}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{200}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{900}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{400}}\\ & \mathbf{=}& \mathbf{2}\mathbf{.}\mathbf{24}\\ & & \end{array}$

Thus, the current ratio is 2.24.