[mdrake]

Calculating ratios; solve for unknowns with the following information

Cash... $1,300,000
Prepaid Expenses... $360,000
Noncurrent assets... $2,400,000
Sharholders Equity... $2,500,000
Current Ratio... 2.0
Debt to Equity... 1.4


How do I solve for the unknowns?:

1. Current liabilities
2. Long term liabilities
3. A/R
4. Acid test Ratio

[pready]

First you should start with the Debt to Equity ratio. The Debt to Equity ratio is total liabilities divided by Owners Equity. Since you have the ratio and Owners equity you can solve for total liabilities. So the ratio rewritten will be: the ratio times Equity equals Total Liabilities. So 1.4 * $2,500,000 = Total liabilities.

Now you are able to solve for total assets. The basic accounting equation is: Total Assets = Total Liabilities + Owners Equity. Just plug in your total liabilities (calculated above) + Owners Equity (given to you).

Now you have total assets you need to solve for current assets. So take you Total Assets minus your noncurrent assets, which will be your total current assets.

Now you can solve for numbers 1 through 4.

1. Current ratio is current assets divided by current liabilities so you need to solve for current liabilities. So your formula rewritten willl be your current assets divided by your ratio will equal your current liabilities.

2. Your long-term liabilites will be your total liabilities minus current liabilities.

3. Your accounts receivable amount will be your current assets minus your cash minus your prepaid expenses.

4. The acid test ratio is current assets minus prepaid expenses minus inventory divided by current liabilities. So take your currents minus prepaid expenses and divide it by your current liabilities.