Question
Asked Dec 23, 2019
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The following data were taken from the balance sheet of Nilo Company at the end of two recent fiscal years:

Please see  the attachment for details:

a. Determine for each year (1) the working capital, (2) the current ratio, and (3) the quick ratio. Round ratios to one decimal place.
b. What conclusions can be drawn from these data as to the company’s ability
to meet its currently maturing debts?

Current Year
Previous Year
Current assets:
$ 320,000
$ 414,000
Cash
Marketable securities
496,800
336,000
Accounts and notes receivable (net)
619,200
464,000
272,000
Inventories
351,900
Prepaid expenses
188,100
208,000
Total current assets
$2,070,000
$1,600,000
Current liabilities:
$ 675,000
$ 600,000
Accounts and notes payable (short-term)
Accrued liabilities
225,000
200,000
$ 800,000
$ 900,000
Total current liabilities
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Current Year Previous Year Current assets: $ 320,000 $ 414,000 Cash Marketable securities 496,800 336,000 Accounts and notes receivable (net) 619,200 464,000 272,000 Inventories 351,900 Prepaid expenses 188,100 208,000 Total current assets $2,070,000 $1,600,000 Current liabilities: $ 675,000 $ 600,000 Accounts and notes payable (short-term) Accrued liabilities 225,000 200,000 $ 800,000 $ 900,000 Total current liabilities

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Expert Answer

Step 1

1(a)

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Working capital for current year Working capital =Current assets – Current liabilities = $2,070,000 – $900,000 = $1,170,000 Working capital for previous year Working capital = Current assets – Current liabilities = $1,600,000 – $800,000 = $8,00,000 Thus, working capital for current year and previous year is $1,170,000 and $8,00,000.

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Step 2

1(b)

 

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Current ratio for current year Current assets Current liabilities $2,070,000 $900,000 = 2.3 Current ratio = Current ratio for previous year Current ratio = Current assets Current liabilities $1,600,000 $800,000 = 2.0 Hence, the current ratio for current year and previous year is 2.3 and 2.0 respectively.

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Step 3

1(c)

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Cash + Marketable securities Quick assets for current year : + Net accounts and notes receivables = $414, 000 + $496, 800 + $619, 200 = $15, 30, 000 (Cash+ Marketable securities (+ Net accounts and notes receivables Quick assets for previous year = = $320, 000 + $336, 000 + $464, 000 = $1, 120, 000 Acid-test ratio for current year Quick assets Acid-test ratio= Current liabilitios $1,530,000 $900,000 = 1.7 Acid-test ratio for previous year Quick assets Current liabilities $1,120,000 $800,000 = 1.4 Acid-test ratio Hence, quick ratio for current year and previous year are 1.7 and 1.4 respectively.

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