Question

Problem C The following data are for Toy Company:

	December 31
	Current	Prior
Prepaid expenses	$34,500	$45,000
Accrued liabilities (short term)	210,000	186,000
Cash in Bank	1,095,000	975,000
Wages payable	-0-	37,500
Accounts payable	714,000	585,000
Merchandise inventory	1,342,500	1,437,000
Bonds payable, due in 2005	615,000	594,000
Marketable securities (short term)	217,500	147,000
Notes payable (due in six months)	300,000	195,000
Accounts receivable	907,500	870,000
Allowance for doubtful accounts	(72,000)	(57,000)
Cash flow from operating activities	192,000	180,000

1. Compute the amount of working capital at both year-end dates.
2. Compute the current ratio at both year-end dates.
3. Compute the acid-test ratio at both year-end dates.
4. Compute the cash flow liquidity ratio at both year-end dates.
5. Comment briefly on the company’s short-term financial position.

Answer 1

Answer with working is given below

a) Current Year Prior Year Current Assets Current Assets Cash in Bank marketable securities Accounts receivable Allowance for doubtful debts Merchandise inventory Prepaid expenses Total Current Assets $1,095,000 $217,500 $907,500 $72,000 $1,342,500 $34,500 $3,525,000 $975,000 $147,000 $870,000 -$57,000 $1,437,000 $45,000 $3,417,000 $714,000 $210,000 Current Liabilities Accounts payable Accrued Liabilities wages payable Notes payable (in 6 months) Total Current Liabilities $585,000 $186,000 $37,500 $195,000 $1,003,500 $300,000 $1,224,000 $2,301,000 $2,413,500 Working Capital (Total Current Assets - Total Current Liabilities) Current Ratio Current Assets Current Liabilities Current Year $3,525,000 $1,224,000 Prior Year $3,417,000 $1,003,500 Current Ratio 2.88 3.41 Acid Test Ratio Quick Assets Current Liabilities Current Year $2,148,000 $1,224,000 Prior Year $1,935,000 $1,003,500 Quick Ratio 1.75 1.93 Quick Assets excludes Inventory and prepaid expenses d) Cash flow Liquidity ratio Cash flow Cash Marketable securities Cash flow from operations Total Cash flow Current Year $1,095,000 $217,500 $192,000 $1,504,500 Prior Year $975,000 $147,000 $180,000 $1,302,000 Current Liabilities $1,224,000 $1,003,500 Cash flow Current Liabilities $1,504,500 $1,224,000 $1,302,000 $1,003,500 Cash flow Liquidity ratio 1.23 1.30 e) Comments on company's short term financial position Current Ratio is good. Usually the standard requirement is 2:1 Quick Ratio is also good. Usually the standard requirement is 1:1 Cash flow Liquidity is good enough to cover the current liabilities Overall the short term financial position of the firm is good