Concept Introduction:
Liquidity Measures:
The set of ratios that measures the ability of the company to pay off its short-term debts or obligations by comparing the assets that can be easily convertible into cash or liquid assets with its short-term liabilities refers to liquidity measurement ratios.
Requirement a:
To calculate:
The working capital from the given data reported in the balance sheet at December 31st, 2016.
Answer to Problem 11.1ME
| Current Assets: | Amount in $ | Amount in $ |
| Cash | 16,000 | |
| Accounts receivables | 44,000 | |
| Merchandise inventory | 60,000 | |
| Total Current Assets (A) | 120,000 | |
| Current Liabilities: | ||
| Wages payable | 10,000 | |
| Accounts payable | 30,000 | |
| Total Current Liabilities (B) | 40,000 | |
| Net working capital (A-B) | 80,000 |
Explanation of Solution
The working capital is computed by using the formula:
Current Assets=
Current Assets=
Total Current Assets=
Current Liabilities=
Total Current Liabilities=
Therefore using the above formula, working capital is:
Working Capital=
Working Capital at December 31st, 2016=
Concept Introduction:
Liquidity Measures:
The set of ratios that measures the ability of the company to pay off its short-term debts or obligations by comparing the assets that can be easily convertible into cash or liquid assets with its short-term liabilities refers to liquidity measurement ratios. Current ratio, acid-test ratio, working capital are the most used liquidity ratios in the business.
Requirement b:
To calculate:
The current ratio from the given balance sheet report to measure the liquidity of the company.
Answer to Problem 11.1ME
| Current Assets: | Amount in $ | Amount in $ |
| Cash | 16,000 | |
| Accounts receivables | 44,000 | |
| Merchandise inventory | 60,000 | |
| Total Current Assets (A) | 120,000 | |
| Current Liabilities: | ||
| Wages payable | 10,000 | |
| Accounts payable | 30,000 | |
| Total Current Liabilities (B) | 40,000 | |
| Current Ratio (A/B) | 3 |
Explanation of Solution
The formula for computing current ratio is:
Current Assets=
Total Current Assets=
Current Liabilities=
Total Current Liabilities=
Therefore using the above formula, current ratio is:
Current Ratio =
Current Ratio at December 31st, 2016=
Concept Introduction:
Liquidity Measures:
The set of ratios that measures the ability of the company to pay off its short-term debts or obligations by comparing the assets that can be easily convertible into cash or liquid assets with its short-term liabilities refers to liquidity measurement ratios. Current ratio, acid-test ratio, working capital are the most used liquidity ratios in the business.
Requirement c:
To calculate:
The acid-test ratio from the given balance sheet report to measure the ability of the company to pay its current liabilities with its quick assets.
Answer to Problem 11.1ME
| Current Assets: | Amount in $ | Amount in $ |
| Cash | 16,000 | |
| Accounts receivables | 44,000 | |
| Total Quick Assets (A) | 60,000 | |
| Current Liabilities: | ||
| Wages payable | 10,000 | |
| Accounts payable | 30,000 | |
| Total Current Liabilities (B) | 40,000 | |
| Acid-test Ratio (A/B) | 1.5 |
Explanation of Solution
The formula for calculating acid-test ratio is:
Therefore using the above formula, acid-test ratio is:
Acid-test Ratio at December 31st, 2016=
Note: Inventory is excluded in acid-test ratio for the reason that it might not turn to cash quickly.
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