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	$	70,000
Accounts receivable, net		410,000
Inventory		680,000
Prepaid expenses		9,000
Plant and equipment, net		1,850,000
Total assets	$	3,019,000

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 $46,000 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.)

Answer 1

Part 1 – Working Capital on June 30

Working Capital is the difference between Current Assets and Current Liabilities. i.e.

Working Capital = Current Assets – Current Liabilities

Current Assets is given in the question

Current Assets
Cash	$70,000
Accounts Receivable, net	$410,000
Inventory	$680,000
Prepaid Expenses	$9,000
Total Current Assets	$1,169,000

Current Ratio is given in the question 2.

Current Ratio = Current Assets / Current Liabilities

2 = Current Assets $1,169,000 / Current Liabilities

Current Liabilities = Current Assets 1,169,000 / 2 = $584,500

Working Capital = Current Assets $1,169,000 – Current Liabilities $584,500

= $584,500

Working Capital on June 30 is $584,500

Part 2 – Acid Test Ratio on June 30

Acid Test Ratio = Quick Assets / Current Liabilities

= Quick Assets $480,000 / Current Liabilities $584,500

= 0.821 times

Quick Assets = Total Current Assets – Inventory – Prepaid Expenses

= $1,169,000 - $680,000 - $9,000

= $480,000

Part 3(a) – Effect of Accounts Payable transaction $46,000 on working capital

Accounts payable is a current liability, so if the current liabilities increase the working capital decreases.

Working Capital = Total Current Assets $1,169,000 – Current Liabilities $584,500 – Accounts Payable $46,000

= $538,500

Part 3(b) –

Current Ratio will be decrease since the denominator i.e. Current liabilities increases, so the current ratio decreases.

Current Ratio = Total Current Assets $1,169,000 / Current Liabilities ($584,500 + $46,000)

= 1.85 times

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you