2123 Urban Inc provides the following data Urban Ind Compara

21-23) Urban, Inc. provides the following data: Urban, Ind. Comparative Balance Sheet Year Ended Dec. 31, 2017 Current Assets: Cash and Cash Equivalents $29,000 Account Receivable, Net 31 Merchandise Inventory Total Current Assets $113,000 roperty, Plant, and Equipment, Net Total Assets Liabilities Current Liabilities Accounts Payable S4 Notes Payable Total Current Liabilities Long-term Liabilities Total Liabilities $7 84,00 91,200 Stockholders\' Equity Common Stock Retained Earnings Total Stockholders\' Equity Total Liabilities and Stockholders\' Equity $37 104,800 $141,800 21. A. Compute the following ratios for Urban Inc. (12pts) Current Ratio (2pts) Debt to Equity Ratio (2pts) 22. Recalculate the above ratios (from $21) considering the effects of purchasing $20,000 of merchandise inventory on account. Show the new ratios (2pts) and their changes (2pts). New Current Ratio (1pts) New Debt to Equity Ratio (1pts) Change in Current Ratio(1 pt) Change in Debt to Equity Ratio (1 pt) C. Did the ratios improve or get worse (4pts)? Current Ratio (2pts) Debt to Equity Ratio (2pts)

Solution

Answer to Question No. 21

Current Ratio = Current Assets / Current Liabilities
Current Ratio = 113,000 / 7,200
Current Ratio = 15.69

Debt to Equity Ratio = Total Debt / Total Equity
Debt to Equity Ratio = 91,200 / 141,800
Debt to Equity Ratio = 0.64

Answer to Question No. 22

The purchase of Merchandise Inventory on account for $20,000 will Increase the Merchandise Inventory (Current Assets) and Accounts Payable (Current Liabilities) by $20,000 each.

Current Ratio = (113,000 + 20,000) / (7,200 + 20,000)
Current Ratio = 133,000 / 27,200
Current Ratio = 4.89

The Increase in Current Liabilities for $20,000 due to purchase of Merchandise Inventory on Account will increase the Debt by $20,000.

Debt to Equity Ratio = Total Debt / Total Equity
Debt to Equity Ratio = (91,200 + 20,000) / 141,800
Debt to Equity Ratio = 111,200 / 141,800
Debt to Equity Ratio = 0.78

Change in Current Ratio = 4.89 – 15.69
Change in Current Ratio = -10.80

Change in Debt to Equity Ratio = 0.78 – 0.64
Change in Debt to Equity Ratio = 0.14

The Current Ratio and Debt to Equity Ratio got worsed, due to purchase of Merchandise Inventory on account.