Question

2. The following data are taken from the sheet at the end of the current year: Cash Trading Investments Accrued Liabilitics Notes Payable, long-term Prepaid Insurance Accounts Payable 525,000 106,000 515,000 90,000 95,000 348,000 1,459,000 89,000 105,000 500,000 Accounts Receivable Salaries Payable Intangible Assets Property, Plant and Equipment Interpretation-what does the result mean? Compute: a. Working capital: b. Current ratio: c. Acid-test ratio: d. Consider the additional information for the above analysis: Current ratio, prior year: 1.8 Industry average: 2.1 Interpret your findings: Are the results acceptable?

Answer 1

1)

WORKING CAPITAL

1306000

( CURRENT ASSETS - CURRENT LIABILITIES)

CURRENT ASSETS

2274000

CURRENT LIABILITIES

968000

( INTERPRETATION : IT’S A POSITIVE WORKING CAPITAL AND IT CAN BE A GOOD SIGN OF SHORT TERM FINANCIAL HEALTH OF THE COMPANY ,

BECAUSE THERE IS ENOUGH WORKING CAPITAL TO PAY OFF SHORT TERM LIABILITY . WITHOUT ADDITIONAL WORKING CAPITAL , COMPANY-

CAN BORROW MORE FUNDS TO THIER BUSINESS . TOO MUCH WORKING CAPITAL ALSO CREATES SOME PROBLEMS TO BUSINESS.)

2)

CURRENT RATIO

2.349174

(CURRENT ASSETS / CURRENT LIABILITIES)

( INTERPRETATION : RATIO BETWEEN 1.5 TO 2.0 SAID THAT A GOOD MANAGEMENT OF WORKING CAPITAL , BELOW ' 1 ' INDICATES CASH PROBLEMS ,

AND ABOVE 2.0 MEANS TOO MUCH WORKING CAPITAL , SO HERE INDICATES TOO MUCH WORKING CAPITAL AND SOME TIMES IT CREATES PROBLEMS -

FOR BUSINESS , IDLE FUNDS WHICH EARN NO PROFIT FOR THR BUSINESS AND THE BUSINESS CANNOT EARN PROPER RATE OF RETURN .)

3)

ACID TEST RATIO

0.743802

(QUICK ASSETS / CURRENT LIABILITIES)

QUICK ASSET

720000

CURRENT LIABILITIES

968000

( GENERALLY THE ACID RATIO SHOULD BE ' 1:1 ' OR HIGHER , BECAUSE THIS VARIES WIDELY BY INDUSTRY, HIGHER RATIO MEANS GREATER THE LIQUIDITY -

OF THE COMPNY AND HERE THE RATIO STANDS BELOW ' 1 ' AND IT SAID THAT THE COMPANY NOT MUCH HAVE ENOUGH LIQUID ASSETS TO MEET THE -

PROPER LIABILITIES OF THE COMPANY , SO COMPANY GIVE MUCH ATTENTION TO THIS RATIO AND LIQUID ASSETS. )

4)

IN THE LAST YEAR CURRENT RATIO BECOME    ' 1.8 '    ,   SO IT SAID THAT THE CURRENT RATIO SHOULD KEEP THE BEST AREA , BECAUSE BETWEEN 1.5 TO 2.0 WILL -

BE A GOOD MANAGEMENT OF WORKING CAPITAL AND IT BECOME TOO MUCH SHORT OR LONG AND COMPANY CAN EFFECTIVELY WORK USING THIS WORKING-

CAPITAL.

INDUSTRY AVERAGE SAID THAT THE PRICE LEVEL OF A GROUP OF STOCKS. SO THE LAST YEAR THE COMPANY SHOWS ' 2.1' AND IT INDICATES COMPANY NOT BAD

IN SUCH A CASE AND PROPER MAINTAINING WILL RESULT BETTER RETURNS TO THE COMPANY .

SO THE COMPANY TRY TO REDUCE THE CURRENT RATIO LIKE LAST YEAR AND THE INDUSTRY AVG RATIO IS NOT MUCH BAD AND PROPER MAINTAINING WILL GIVE

MUCH BETTER RESULT TO THE COMPANY.