Question

Selected condensed data taken from a recent balance sheet of Heidebrecht Inc. are as follows. HEIDEBRECHT INC. Balance Sheet (partial) Cash $7,910,000 Short-term investments 4,980,000 Accounts receivable 12,320,000 Inventory 14,570,000 Other current assets 5,430,000 Total current assets $45,210,000 Total current liabilities $40,020,000 What are the (a) working capital, (b) current ratio, and (c) acid-test ratio?

Answer 1

Answer:

Explanation:

Working Capital:

Working Capital represents the capital available to an organisation to run its day to day expenses.

Formula= Current Assets-Current Liabilities

Total Current Assets= $45,210,000

Total Current Liabilities= $40,020,000

Working Capital= 45,210,000-40,020,000= $‭5,190,000‬

Current Ratio

This measures an organisation's ability to meet its financial obligations due within a year

Formula= Current Assets÷ Current Liablities

= 45,210,000÷40,020,000

= 1:13

Acid-test Ratio

The acid-test ratio is also known as the Quick Ratio. It represents a company's measure of liquidity and it indicates the company's ability to cover its short-term liabilities through its short-term Liquid (easily converted to cash) Assets.

Formula: (Current Asset-Inventory-Other Current Assets)÷ Current Liabilities

Current Asset- Inventory= 45,210,000-14,570,000-5,430,000=  ‭25,210,000‬‬

Acid-test Ratio= ‭25,210,000‬÷ 40,020,000=0.63

Note: Other Current Assets were also deducted because we cannot easily decide whether they can be quickly or easily converted to cash or not.