Please help me answer Norsk Optronics. ALS. of Bergen. Norway, had a current rat

Question

Please help me answer

Norsk Optronics. ALS. of Bergen. Norway, had a current ratio of 2.5 on June 30 ofthe current year. On that date, the company's assets were: What was the company's working capital on June 30? Working capital What was the company's acid-test ratio on June 30? (Round your answer to 2 decimal places.) Acid-test ratio The company paid an account payable of $40,000 immediately after June 30. What effect did this transaction have on working capital? Working capital would increase. Working capital would decrease. Working capital would not be affected. What effect did this transaction have on the current ratio? Current ratio would increase. Current ratio would decrease. Current ratio would not be affected.

Explanation / Answer

1. Working Capital = Current Assets - Current Liabilities.

In the give problem we have current ratio as 2.5 which is equal to Current Assets / Current Liabilities.

From this lets derive Working Capital : 2.5 = Current Assets ( 16,50,000 - 8,00,000 = 8,50,000) / Current Liabilities.

Hence Current Liabilities = 8,50,000 / 2.5 = 3,40,000. Working Capital = 8,50,000 - 3,40,000 = 5,10,000

2. Acid Test Ratio: (Cash + Accounts Receivable + Short-term Investments) / Current Liabilities.

In this case = (90,000 + 260,000) / 3,40,000 = 1.03

3. a. Working Capital Would not be affected

3. b. Current Ratio would increase. Current Ratio goes from 2.5 to 2.7

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