Evaluation of current ratio and acid test ratio

Reference no: EM1315943

Calculation of Current ratio and Acid test ratio.

Utilizing the attached Enclosure 1 "Balance Sheet and Income Statement for Spectrum, Inc"

ENCLOSURE 1

Spectrum, Inc. BALANCE SHEET (000)
Cash	$500
Accounts receivable	1,500
Inventories	500
Current assets	2,500
Net fixed assets	5,000
Total Assets	$7,500.00

Accounts payable	1,200
Bank note	300
Total current liabilities	1,500
Long term debt	4,000
Common stock	300
Retained earnings	1,700
Total liabilities and owner's equity	$7,500

Spectrum, Inc. INCOME STATEMENT (000)
Net sales	$8,500
Cost of goods sold	3,400
Gross profit	5,100
Operating expenses	2,900
Net operating income	2,200
Interest expense	580
Earnings before taxes	1,620
Income tax (34%)	551
Net income	$1,069

a) Compute the following ten (10) financial ratios and provide a one sentence explanation of the analytic use of each ratio test. Show your formulas and input. Accuracy to two decimal points is sufficient.
b) Evaluate how Spectrum's financial performance compares to their Industry for each calculated ratio. It is sufficient to rate each ratio as "G"= good, "S" = satisfactory, or "P" = poor.

	Industry Norms
Current ratio	1.5
Acid test ratio	1.06

Reference no: EM1315943

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