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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Based on the information in RE4-2 and RE4-3, calculate Dorothy Corporation’s working capital and current ratio.

RE4-3. Dorothy Corporation had the following accounts in its year-end adjusted trial balance: Accounts Payable. $7,200; Salaries Payable, $5,800; Income Taxes Payable, $4,000; Short-Term Notes Payable, $2,500; Dividends Payable, $750; Investment in Held-to-Maturity Bonds, $2,750; and Allowance for Doubtful Accounts, $1,100. Prepare the current liabilities section of Dorothy’s balance sheet.

RE4-2. Dorothy Corporation had the following accounts in its year-end adjusted trial balance: Inventories, $23,600; Accounts Receivable, $7,600; Accounts Payable, $7,200; Prepaid Rent, $2,400; Marketable Securities, $3,000; Allowance for Doubtful Accounts, $1,100; and Cash, $1,500. Prepare the current assets section of Dorothy’s year-end balance sheet.

To determine

Calculate D’s Corporation working capital and current ratio.

Explanation

Working capital ratio: The measure which evaluates the ability of a company to pay off the short-term debt obligations, by computing the excess of current assets over current liabilities is referred to as working capital ratio.

Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Calculate D’s Corporation working capital and current ratio.

Working Capital=(Current assetsCurrent liabilities )($37,000$20,250Current liabilities )=$16,750

Current ratio = (Current assetsCurrent liabilities)($37,000$20,250)=1

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