Question

ABC Inc. has total asset of $10 million, net working capital of $1 million. Owner's equity is $5 million, long term debt is $2 million. The value of its current assets is $ _____ million?

Answer 1

The basic accounting equation is as follows:

Total Assets = Total Liabilities + Owner's Equity

or, Current Assets + Long Term Assets = Current Liabilities + Long Term Liabilities + Owner's Equity

Here, owner's equity is $5 million and long term liabilities comprising long term debt is $2 million.

Total Liabilities = Total Assets - Owner's Equity

or, Total Liabilities = $10 million - $5 million = $5 million.

Again, Total Liabilities = Current Liabilities + Long Term Liabilities

or, Current Liabilities = Total Liabilities - Long Term Liabilities

or, Current Liabilities = $5 million - $2 million = $3 million.

According to problem,

Net working capital = $1 million

or, Current Assets - Current Liabilities = $1 million

or, Current Assets = $1 million + $3 million = $4 million.

Hence, the value of current assets is $4 million.