Question

Norsk Optronics, ALS, of Bergen, Norway, had a current ratio of 2 on June 30 of the current year. On that date, the company's assets were: Cash Accounts receivable, net Inventory Prepaid expenses Plant and equipment, net Total assets $ 80,000 400,000 660,000 10,000 1,860,000 $3,010,000 Required: 1. What was the company's working capital on June 30? 2. What was the company's acid-test ratio on June 30? (Round your answer to 2 decimal places.) 3. The company paid an account payable of $40,000 immediately after June 30. a. What effect did this transaction have on working capital? b. What effect did this transaction have on the current ratio? (Round your intermediate calculations to 1 decimal place.) 1. Working capital 2. Acid-test ratio 3a. Effect on working capital 36. Effect on current ratio Working capital would not be affected Current ratio would increase

Answer 1

1. We can calculate working capital by below formula

Working Capital = Current Assets – Current Liabilities

In given example, we have below information as on 30^th June

Current ratio = 2

Current Assets = $ 1,150,000 (Cash & Cash equivalent + Inventory + Account receivables )

Now, by using below formula, will drive current liabilities

Current ratio = Current Assets/Current Liabilities

2=$1,150,000/Current Liabilities

Current Liabilities = $ 575,000

Working Capital = $1,150,000 - $575,000

Working Capital = $ 575,000

So, working capital as on 30^th June was $ 575,000

2. Acid test ratio formula is as below

Acid test ratio = (Cash & Cash Equivalents + Account Receivables + Marketable Securities)/Current Liabilities

                              = ($ 80,000+ $ 400,000)/ $575,000

                              =0.83

3. A. After payment of account payable of $ 40,000 after 30^th June, Current assets and current liabilities will change as below

Current Assets = $1,150,000 - $ 40,000 = $ 1,110,000

Current Liabilities = $ 575,000 - $ 40,000 = $ 5,35,000

Now working capital = $ 1,110,000 - $ 5,35,000 = $ 575,000

So, working capital remain same as earlier

B. Now Current ratio = $ 1,110,000/ $535,000 = 2.07

Current ratio would increase after payment of account payable