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Read the information supplied and answer the questions which follow - Leaving Cert Business - Question 6 - 2018

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Read the information supplied and answer the questions which follow. Social Media Advertising Ireland Ltd Niamh O'Byrne is a Business Studies student from the Univ... show full transcript

Worked Solution & Example Answer:Read the information supplied and answer the questions which follow - Leaving Cert Business - Question 6 - 2018

Step 1

Calculate the Working Capital Ratio

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Answer

The Working Capital Ratio is calculated using the formula:

Working Capital Ratio=Current AssetsCurrent Liabilities\text{Working Capital Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}

Substituting in the values from the data:

Working Capital Ratio=84,00042,000=2:1\text{Working Capital Ratio} = \frac{84,000}{42,000} = 2:1

This means that for every euro of liability, the business has two euros in assets.

Step 2

Calculate the Acid Test Ratio

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Answer

The Acid Test Ratio is calculated using the formula:

Acid Test Ratio=Current Assets−Closing StockCurrent Liabilities\text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Closing Stock}}{\text{Current Liabilities}}

Using the values given:

Acid Test Ratio=84,000−14,00042,000=70,00042,000≈1.66:1\text{Acid Test Ratio} = \frac{84,000 - 14,000}{42,000} = \frac{70,000}{42,000} \approx 1.66:1

This indicates that the business can cover its immediate liabilities without relying on the sale of inventory.

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