Computing Working Capital; Explaining the Quick Ratio and Working Capital
Diane Corporation is preparing its 2012 balance sheet. The company records show the following selected amounts at the end of the accounting period. December 31, 2012:
Total assets | $530,000 |
Total noncurrent assets | 362,000 |
Liabilities: |
|
Notes payable (8%. due in 5 years) | 15,000 |
Accounts payable | 56,000 |
Income taxes payable | 14,000 |
Liability for withholding taxes | 3,000 |
Rent revenue collected in advance | 7,000 |
Bonds pay able (due in 15 years) | 90,000 |
Wages pay able | 7,000 |
Property taxes payable | 3,000 |
Note payable (10%. due in 6 months) | 12,000 |
Interest payable | 400 |
Common stock | 100,000 |
Required:
1. Compute (a) working capital and (b) the quick ratio (quick assets are $70,000). Why is working capital important to management? How do financial analysts use the quick ratio?
2. Would your computations be different if the company reported $250,000 worth of contingent liabilities in the notes to the statements? Explain.
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