The following amounts were reported on the December 31, 2016, balance sheet: Cas

Question

The following amounts were reported on the December 31, 2016, balance sheet: Cash $ 9,000 Accounts receivable 33,000 Common stock 50,000 Wages payable 16,000 Retained earnings 125,000 Land 30,000 Accounts payable 19,000 Bonds payable 110,000 Merchandise inventory 28,000 Buildings and equipment, net of accumulated depreciation 220,000

Required (show all work):

(a.) Calculate working capital at December 31, 2010.
(b.) Calculate the current ratio at December 31, 2016.
(c.) Calculate the acid-test ratio at December 31, 2016.

The following amounts were reported on the December 31, 2016, balance sheet: Cash Accounts receivable Common stock Wages payable Retained earnings Land Accounts payable Bonds payable Merchandise inventory Buildings and equipment, net of accumulated depreciation $ 9,000 33,000 50,000 16,000 125,000 30,000 19,000 110,000 28,000 220,000

Explanation / Answer

Current assets are those which can be encashed within a year and current liailities are those which are to be paid within a year.

Therefore, current assets = cash + accounts receivable + merchandise inventory = 9000 + 33000 + 28000 = 70000

current liabilities = wages payable + accounts payable = 16000 + 19000 = 35000

a) Working capital is the capital which is required for functioning of day to day trading operations. It comprises of current assets and current liabilities.

Net Working capital = Current assets (-) current liabilities = 70000 (-) 35000 = 35000

b) Current ratio helps in identifying whether the company has enough current assets to pay off its current liabilities.

Current ratio = current assets / current liabilities = 70000 / 35000 = 2

Therefore, current assets are 2 times the current liabilities.

c) Acid test ratio helps in identifying how quickly it can pay off the current liabilities. This can be possible only when the assets liquidity power is high. In our case, inventory can not be liquidated immediately.

Therefore, acid test ratio = [current assets (-) inventory] / current liabilities = [70000 - 28000] / 35000 = 42000 / 35000 = 1.2

This means, in order to payoff the current obligations of $35000 immediately, the company has $42000. Hence, quick assets or liquid assets are 1.2 times of current liabilities.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.