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Underwood Boutique reported the following financial data for 2022 and 2021. Instructions a. Calculate the current ratio

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Underwood Boutique reported the following financial data for 2022 and 2021. 

Underwood Boutique Balance Sheet (partial) September 30 (in thousands) 2022 2021 Current assets Cash and short-term depo


Instructions 

a. Calculate the current ratio for Underwood Boutique for 2022 and 2021. 

b. Suppose that at the end of 2022, Underwood Boutique used $1.5 million cash to pay off $1.5 million of accounts payable. How would its current ratio change? 

c. At September 30, Underwood Boutique has an undrawn operating line of credit of $12.5 million. Would this affect any assessment that you might make of Underwood Boutique’s short-term liquidity? Explain.

Line of Credit
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is...
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Underwood Boutique Balance Sheet (partial) September 30 (in thousands) 2022 2021 Current assets Cash and short-term deposits $2,574 $1,021 Accounts receivable 2,147 1,575 Inventories 1,201 1,010 Other current assets 322 192 Total current assets $6,244 $3,798 Current liabilities $4,503 $2,619

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a Current ratio 20226244 4503 1391 20213798 2619 1451 b Current ratio 6244 1500 ...View the full answer


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The current ratio is a financial ratio that measures a company\'s ability to pay its short-term obligations with its short-term assets. It is calculated by dividing a company\'s current assets by its current liabilities. The formula for calculating the current ratio is: Current Ratio = Current Assets / Current Liabilities Current assets are assets that can be converted to cash within one year, while current liabilities are debts that are due within one year. A current ratio of 1:1 or greater is generally considered good, as it indicates that a company has enough current assets to cover its current liabilities. A current ratio of less than 1:1 may suggest that a company may have difficulty meeting its short-term obligations. It\'s important to note that the current ratio is just one of many financial ratios that can be used to assess a company\'s financial health. It should be used in conjunction with other financial ratios and qualitative factors to make informed decisions about investing or lending to a company.

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