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Current position analysis The following data were taken from the balance sheet of Nilo Company at the end of two recent fiscal years: 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?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 17, Problem 6E
Textbook Problem
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Current position analysis

The following data were taken from the balance sheet of Nilo Company at the end of two recent fiscal years:

Chapter 17, Problem 6E, Current position analysis The following data were taken from the balance sheet of Nilo Company at

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

a.

To determine

Compute Current position analysis for current year and previous year.

Explanation of Solution

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

Working capital is determined as the difference between current assets and current liabilities.

Formula: 

Working capital = Current assets – Current liabilities

Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Formula:

Current ratio=Current assetsCurrentliabilities

Acid-Test Ratio is the ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio:

Acid Ratio=Quick assetsCurrentliabilities

(1)

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= $800,000

Thus, working capital for current year and previous year is $1,170,000 and $800,000.

(2)

Current ratio for current year

Current ratio=Current assetsCurrentliabilities=$2,070,000$900,000=2.3

Current ratio for previous year

Current ratio=Current assetsCurrentliabilities=$1,600,000$800,000=2

b.

To determine

Provide conclusion towards company’s ability to meet the currently maturing debt.

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Financial Accounting
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