Question

(Analysis of assets)
You have inherited money from your grandparents, and a friend suggests that you consider buying shares in Galena Ski Products, which manufactures skis and bindings. Because you may need to sell the shares within the next two years to finance your university education, you start your analysis of the company data by calculating (1) working capital, (2) the current ratio, and (3) the quick ratio. Galena’s statement of financial position is as follows:

Current assets
Cash		$155,100
Inventory		198,800
Prepaid expenses		21,800
Non-current assets
Land		52,100
Building and equipment		143,700
Other		13,900
Total		$585,400
Current liabilities		$180,600
Long-term debt		176,700
Share capital		72,200
Retained earnings		155,900
Total		$585,400

What amount of working capital is currently maintained?

Working capital

$

Your preference is to have a quick ratio of at least 0.80 and a current ratio of at least 2.00. How do the existing ratios compare with your criteria? Does not exceed the criteria or Exceeds the criteria (Round answers to 2 decimal places, e.g. 18.42.)

Current ratio
Quick ratio

Answer 1

Current Assets = $155,100 + $198,800 + $21,800 = $375,700

a). Working capital = Current assets - Current liabilities
= $375,700 - $180,600
= $195,100

b). Current ratio = Current assets / Current liabilities
= $375,700 / $180,600
= 2.08 times

c). Quick Assets = Cash
(Inventory and prepaid expense are not a part of quick assets).

Quick ratio = Quick assets / Current liabilities
= $155,100 / $180,600 = 0.86 times

Both Current Ratio and Quick Ratio exceeds the criteria of minimum requirement.