Question

Webcom. Inc. had the following current assets and current liabilities at the end of two recent years:

Current Year (in millions) Previous Year (in millions)
Cash and cash equivalents $8,297 $4,067
Short-term investments, at cost 422 458
Accounts and notes receivable, net 7,041 6,912
Inventories 3,581 3,827
Prepaid expenses and other current assets 1,479 2,377
Short-term obligations 4,815 6,205
Accounts payable 12,774 11,949

Requried:
a. What is the Current Ratio for the current year?
b. What is the Current Ratio for the preceding year?
c. What is the Quick Ratio for the current year?
d. What is the Quick Ratio for the preceding year?
e. What is the Working Capital for the current year?
f. What is the Working Capital for the preceding year?

Answer 1

a. Current Ratio for the current year = 1.18

b. Current Ratio for the preceding year = 0.97

c. Quick Ratio for the current year = 0.98

d. Quick Ratio for the preceding year = 0.76

e. Working Capital for the current year = $3,231

f. Working Capital for the preceding year = –$513

Step-by-step explanation:

Based on the information provided in the question, we first state the following formula to be used before answering the question:

Current asset = Cash and cash equivalents + Short-term investments, at cost + Accounts and notes receivable, net + Inventories + Prepaid expenses and other current assets ................... (1)

Current liabilities = Short-term obligations + Accounts payable ................. (2)

Current ratio = Current assets / Current liabilities ............................ (3)

Quick Ratio = (Current assets - Inventory) / Current liabilities ............... (4)

Working capital = Current assets - Current Liabilities ........................... (5)

We now calculate the answers as follows:

a. What is the Current Ratio for the current year?

Using equation (1), we have:

Current asset for the current year (in millions) = $8,297 + $422 + $7,041 + $3,581 + $1,479 = $20,820

Using equation (2), we have:

Current liabilities for the current year (in millions) = $4,815 + $12,774 = $17,589

Using equation (3), we have:

Current ratio for the current year = $20,820 / $17,589 = 1.18

b. What is the Current Ratio for the preceding year?

Using equation (1), we have:

Current asset for the preceding year (in millions) = $4,067 + $458 + $6,912 + $3,827 + $2,377 = $17,641

Using equation (2), we have:

Current liabilities for the preceding year (in millions) = $6,205 + $11,949 = $18,154

Using equation (3), we have:

Current ratio for the preceding year = $17,641 / 18,154 = 0.97

c. What is the Quick Ratio for the current year?

Using equation (4) and calculations from part a, we have:

Quick Ratio for the current year = ($20,820 - 3,581) / $17,589 = 0.98

d. What is the Quick Ratio for the preceding year?

Using equation (4) and calculations from part b, we have:

Quick Ratio for the preceding year = ($17,641 - 3,827) / $18,154 = 0.76

e. What is the Working Capital for the current year?

Using equation (5) and calculations from part a, we have:

Working Capital for the current year = $20,820 - $17,589 =$3,231

f. What is the Working Capital for the preceding year?

Using equation (5) and calculations from part b, we have:

Working Capital for the preceding year = $17,641 - $18,154 = –$513