Final answer:
The working capital at December 31, 2022 is -$360,000, indicating that the current liabilities exceed the current assets. The current ratio is 0.518 or 52%, which suggests that the company may have difficulty covering its short-term liabilities with its short-term assets. The acid-test ratio is 0.401 or 40.1%, demonstrating a limited ability to pay off short-term debts when excluding inventory.
Step-by-step explanation:
Working Capital:
Working Capital is calculated by subtracting current liabilities from current assets. In this case, the current assets include cash, accounts receivable, merchandise inventory, and land. The current liabilities include wages payable, accounts payable, and bonds payable. So, the formula to calculate working capital is: Working Capital = Current Assets - Current Liabilities. Working Capital = ($48,000 + $132,000 + $87,840 + $120,000) - ($30,000 + $13,200 + $704,640) = $387,840 - $747,840 = - $360,000 Since the working capital is negative, it indicates that the current liabilities exceed the current assets.
Current Ratio:
The current ratio is calculated by dividing the total current assets by the total current liabilities. The formula for current ratio is: Current Ratio = Current Assets ÷ Current Liabilities. Current Ratio = ($48,000 + $132,000 + $87,840 + $120,000) ÷ ($30,000 + $13,200 + $704,640) = $387,840 ÷ $747,840 = 0.518 or 52% The current ratio is generally used to assess a company's ability to pay its short-term liabilities using its short-term assets. A ratio above 1 indicates that a company has more than enough current assets to cover its current liabilities.
Acid-Test Ratio:
The acid-test ratio, also known as the quick ratio, is a measure of a company’s short-term liquidity and ability to pay off its current liabilities. The formula for acid-test ratio is: Acid-Test Ratio = (Current Assets - Inventory) ÷ Current Liabilities. Acid-Test Ratio = ($48,000 + $132,000 + $120,000) ÷ ($30,000 + $13,200 + $704,640) = $300,000 ÷ $747,840 = 0.401 or 40.1% The acid-test ratio excludes inventory from current assets because inventory may not be easily converted into cash. A higher acid-test ratio indicates a greater ability to pay off short-term debts.