Question

I need help in solving this problem as well as getting a better understanding of it, thank you.

The chief financial officer (CFO) of Wildhorse Co. requested that the accounting department prepare a preliminary balance sheet on December 30, 2022, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows. Wildhorse Co. Balance Sheet December 30, 2022 Current assets Cash Accounts receivable Prepaid insurance Equipment (net) $26,200 30,500 6,000 $ 62,700 201,400 $264,100 Total assets Current liabilities Accounts payable Salaries and wages payable Long-term liabilities $ 22,000 11,000 $33,000 Notes payable 79,700 112,700 Total liabilities Stockholders' equity Common stock 100,000 51,400 Retained earnings 151,400 $264,100 Total liabilities and stockholders' equity

Answer 1

Part a)

Current ratio = current assets ÷ current liabilities

= $ 62700 ÷ 33000

= 1.9 : 1

Thus the correct answer is current ratio = 1.9 : 1

Working capital = current assets - current liabilities

= 62700 - 33000

= 29700

Thus the correct answer is working capital = $ 29700

Part b)

After the corrective action ,following are the answers

Current ratio = current assets ÷ current liabilities

= (62700-22000)÷(33000-22000)

= 3.7

Thus final answer is current ratio = 3.7 : 1

Working capital = current assets- current liabilities

= (62700-22000) - (33000-22000)

= $ 29700

Thus the correct answer is working capital = $ 29700

Explanation

Current ratio refer to the ratio which tells about whether the company will be able to meet it's short term obligations or not. Ideally the current ratio should be 2:1.

Working capital is basically the difference between the current assets and current liabilities. It shows the liquidity position of the company.