Question

Current position analysis

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				$643,500			$511,200
Marketable securities				847,500			603,200
Accounts and notes receivable (net)				1,043,400			725,600
Inventories				1,301,800			1,049,500
Prepaid expenses				643,800			652,500
	Total current assets			$4,480,000			$3,542,000
Current liabilities:
Accounts and notes payable (short-term)				$928,000			$766,700
Accrued liabilities				352,000			383,300
	Total current liabilities			$1,280,000			$1,150,000

1. Determine for each year (1) the working capital, (2) the current ratio, and (3) the quick ratio. Round the ratios to one decimal place and the working capital to the nearest dollar.

   			Current Year			Previous Year
   1. Working capital	$			$
   2. Current ratio
   3. Quick ratio

2. The liquidity of Nilo has [improved or declined] from the preceding year to the current year. The working capital, current ratio, and quick ratio have all [increased or decreased]. Most of these changes are the result of a(n) [increased or decreased]  in current assets relative to current liabilities.

Answer 1

a.
1) Working capital is the amount of capital required for the day-to-day running of the business. It is the difference between Current assets and current liabilities.

Working capital = Current assets - Current liabilities

Current year:

Working capital = $4,480,000 - $1,280,000 = $3,200,000

Previous year:

Working capital = $3,542,000 - $1,150,000 = $2,392,000

2) Current ratio evaluates the liquidity of a business. It compares current assets with current liabilities.

Current ratio = Current assets ÷ Current liabilities

Current year:

Current ratio = $4,480,000 ÷ $1,280,000 = 3.5

Previous year:

Current ratio = $3,542,000 ÷ $1,150,000 = 3.08

3) Quick ratio also measures the high liquidity of the business in terms of quick assets and current liabilities. Quick assets means current assets excluding inventory and prepaid assets.

Quick ratio = Quick assets ÷ Current liabilities

Current year:

Quick assets = Current assets - Inventory and prepaid expenses
= $4,480,000 - $1,301,800 - $643,800 = $2,534,400

Quick ratio = $2,534,400 ÷ $1,280,000 = 1.98

Previous year:

Quick assets = Current assets - Inventory and prepaid expenses
= $3,542,000 - $1,049,500 - $652,500 = $1,840,000

Quick ratio = $1,840,000 ÷ $1,280,000 = 1.44

1. Working capital 2. Current ratio 3. Quick ratio Current Year Previous Year $3,200,000 $2,392,000 3.5 3.08 1.98 1.44

b. The liquidity of Nilo has improved from the preceding year to the current year. The working capital, current ratio, and quick ratio have all increased. Most of these changes are the result of an increase in current assets relative to current liabilities.