Working Capital and Short-Term Firm Liquidity Ratios
Favor Company has a current ratio of 2.08 (2.08:1) on December 31.
On that date its current assets are as follows:
| Cash and cash equivalents | $28,000 |
| Short-term investments | 87,000 |
| Accounts receivable (net) | 125,000 |
| Inventory | 258,500 |
| Prepaid expenses | 9,980 |
| Current assets | $508,480 |
Favor Company's current liabilities at the beginning of the year
were $192,000 and during the year its operating activities provided
a cash flow of $38,830.
a. What are the firm's current liabilities at December 31?
Round answer to the nearest whole number.
Answer
b. What is the firm's working capital on December 31?
Round answer to the nearest whole number.
Answer
c. What is the quick ratio on December 31?
Round to 2 decimal points.
Answer
d. What is the firm's operating-cash-flow-to-current-liabilities
ratio?
Round answer to 2 decimal places.
Answer
| Req a: | ||||||
| Current Ratio: 2.08 | ||||||
| Current Assets | 508480 | |||||
| (28000+87000+125000+258500+9980) | ||||||
| Current ratio= Current Assets/ Current liabilities | ||||||
| 2.08 =508480 / Current Liabilities | ||||||
| Current liabilities: | 244,462 | |||||
| Req b: | ||||||
| Working Capital = Current Assets - Current Liabilities | ||||||
| 508480 -244,462 = 264018 | ||||||
| Req c: | ||||||
| Quick ratio: Liquid assets/ Current Liabilities | ||||||
| Liquid assets: Current assets-Inventory-prepaid expense | ||||||
| 508480 -258500-9980 = 240,000 | ||||||
| Quick ratio: Liquid assets / Current liabilities | ||||||
| 240000 / 244,462 = 0.98 | ||||||
| Req d: | ||||||
| Operating cash flows to Current liabilities ratio: Cash flows from Operating activities / Current liabilities | ||||||
| 38830 /244,462 = 0.159 | ||||||
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