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Accounting (Text Only)
Working capital and current ratio
Balance sheet data for Brimstone Company follows:
| 2016 | 2015 | |
| Current assets | $1,586,250 | $1,210,000 |
| Current liabilities | 705,000 | 550,000 |
a. Determine the working capital and current ratio for 2016 and 2015.
b. Does the change in the current ratio from 2015 to 2016 indicate a favourable or an unfavorable trend?
(a)
Ratio analysis
It is the financial analysis tool for measuring the profitability, liquidity, capability and overall performance of a company.
Following are the two measures of liquidity:
- 1. Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. The following formula is used to calculate current ratio.
- 2. Working capital: Total current assets minus total current liabilities are the working capital of a company.
The working capital and current ratio for 2016 and 2015.
| Details | 2016 ($) | 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.
(b)
To Indicate: The change in current ratio form 2015 to 2016.
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