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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Working capital and current ratio

Balance sheet data for Brimstone Company follows:

2016 2015
Current assets $1,586,250 $1,210,000
Current liabilities 705,000 550,000

a. Determine the working capital and current ratio for 2016 and 2015.

b. Does the change in the current ratio from 2015 to 2016 indicate a favourable or an unfavorable trend?

(a)

To determine

Ratio analysis

It is the financial analysis tool for measuring the profitability, liquidity, capability and overall performance of a company.

Following are the two measures of liquidity:

  1. 1. Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. The following formula is used to calculate current ratio.
  2. 2. Working capital: Total current assets minus total current liabilities are the working capital of a company.

 The working capital and current ratio for 2016 and 2015.

Explanation
Details 2016 ($) 2015 ($)
Current assets 1,586,250 1,210,000
Less: Current liabilities (705,000) (550,000)
Working capital $881,250 $660,000

Table (1)

Calculate the current ratio for 2015 and 2016.

Current ratio for 2015=Current assetsCurrentliabilities=$1,210,000$550,000=2

(b)

To determine

To Indicate: The change in current ratio form 2015 to 2016.

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