Question

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

Current Year Previous Year
Current assets:
Cash $391,000 $300,000
Marketable securities 515,000 354,000
Accounts and notes receivable (net) 634,000 426,000
Inventories 368,000 222,000
Prepaid expenses 182,000 138,000
Total current assets $2,090,000 $1,440,000
Current liabilities:

Accounts and notes payable (short-term) $725,000 $600,000
Accrued liabilities 275,000 300,000
Total current liabilities $1,000,000 $900,000

Required:
Determine for each year:
a. the working capital
b. the current ratio
c. the quick ratio.

Answer 1

a. Current Year working capital is $1,090,000; and Previous Year working capital is $540,000.

b. Current Year current ratio is 2.09; and Previous Year current ratio is 1.60.

c. Current Year quick ratio is 1.72; and Previous Year quick ratio is 1.35.

Step-by-step explanation:

a. the working capital

This can be calculated using the following formula:

Working capital = Total current assets - Total current liabilities ............ (1)

Using equation (1), we therefore have:

Current Year working capital = Current Year total current assets - Current Year total current liabilities = $2,090,000 - $1,000,000 = $1,090,000

Previous Year working capital = Previous Year total current assets - Previous Year total current liabilities = $1,440,000 - $900,000 = $540,000

b. the current ratio

This can be calculated using the following formula:

Current ratio = Total current assets /Total current liabilities ................ (2)

Using equation (2), we therefore have:

Current Year current ratio = Current Year total current assets / Current Year total current liabilities = $2,090,000 / $1,000,000 = 2.09

Previous Year current ratio = Previous Year total current assets / Previous Year total current liabilities = $1,440,000 / $900,000 = 1.60

c. the quick ratio

This can be calculated using the following formula:

Quick ratio = (Total current assets - Inventories) / Total current liabilities .............. (3)

Using equation (3), we therefore have:

Current Year quick ratio = (Current Year total current assets - Current Year Inventories) / Current Year total current liabilities = ($2,090,000 - $368,000) / $1,000,000 = $1,722,000 / $1,000,000 = 1.72

Previous Year quick ratio = (Previous Year total current assets - Previous Year Inventories) / Previous Year total current liabilities = ($1,440,000 - $222,000) / $900,000 = $1,218,000 / $900,000 = 1.35