Answer each of the questions in the following unrelated situations.

a) The current ratio of a company is 5:1 and its acid-test ratio is 1:1. If the inventories and prepaid items amount to $500,000, what is the amount of current liabilities?

Accounting ratios refer to a variety of ratios used by accountants to assess profitability, liquidity, and future financial hardship in a company's financial statements. Accountants and financial experts utilize the ratios to communicate and examine issues or accomplishments over a set period of time.

Current Liabilities = $125,000

Working Notes:

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{Assets}}{\mathrm{Current}\mathrm{Liabilities}}\\ \frac{5}{1}& =& \frac{\mathrm{Current}\mathrm{Assets}}{\mathrm{Current}\mathrm{Liabilities}}\\ \mathrm{Current}\mathrm{assets}& =& 5\times \mathrm{Current}\mathrm{liabilities}\\ & & \mathrm{Let}\mathrm{current}\mathrm{liabilities}\mathrm{be}\mathrm{x}\\ \mathrm{Acid}\mathrm{test}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{assets}-\mathrm{Inventories}-\mathrm{Prepaid}\mathrm{expenses}}{\mathrm{Current}\mathrm{liabilities}}\\ \frac{1}{1}& =& \frac{\mathrm{Current}\mathrm{assets}-\mathrm{Inventories}-\mathrm{Prepaid}\mathrm{expenses}}{\mathrm{Current}\mathrm{liabilities}}\\ & & \end{array}$

Now we compare both the equation to find out current liabilities

The amount of current assets is 5x of current liabilities, hence the equation to compute current assets and liabilities is:

$\begin{array}{rcl}\mathrm{Current}\mathrm{Asset}-\$500,000& =& \mathrm{Current}\mathrm{liabilities}\\ 5\times \mathrm{Current}\mathrm{liabilities}-\$500,000& =& \mathrm{Current}\mathrm{liabilities}\\ & & \end{array}$

Let’s Assume liabilities and assets as x and 5x respectively and calculate the equation,

$\begin{array}{rcl}5\times \mathrm{x}-\$500,000& =& \mathrm{x}\\ 5\mathrm{x}-\mathrm{x}& =& \$500,000\\ 4\mathrm{x}& =& \$500,000\\ \mathrm{x}& =& \frac{\$500,000}{4}\\ \mathrm{x}& =& \$125,000\end{array}$

Hence, the amount of liabilities is $25,000 and assets is $125,000.