Question

Current Position Analysis

The following data were taken from the balance sheet of Nilo Company at the end of two recent fiscal years:

				Current Year			Previous Year
Current assets:
Cash				$421,800			$307,200
Marketable securities				488,400			345,600
Accounts and notes receivable (net)				199,800			115,200
Inventories				1,611,700			1,132,200
Prepaid expenses				830,300			723,800
	Total current assets			$3,552,000			$2,624,000
Current liabilities:
Accounts and notes payable
	(short-term)			$429,200			$448,000
Accrued liabilities				310,800			192,000
	Total current liabilities			$740,000			$640,000

a. Determine for each year (1) the working capital, (2) the current ratio, and (3) the quick ratio. Round ratios to one decimal place.

			Current Year			Previous Year
1. Working capital	$			$
2. Current ratio
3. Quick ratio

b. The liquidity of Nilo has improved  from the preceding year to the current year. The working capital, current ratio, and quick ratio have all  . Most of these changes are the result of an increase  in current assets relative to current liabilities.

Answer 1

Answer a.

Current Year:

Working Capital = Current Assets - Current Liabilities
Working Capital = $3,552,000 - $740,000
Working Capital = $2,812,000

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $3,552,000 / $740,000
Current Ratio = 4.80

Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities
Quick Ratio = ($3,552,000 - $1,611,700 - $830,300) / $740,000
Quick Ratio = 1.50

Previous Year:

Working Capital = Current Assets - Current Liabilities
Working Capital = $2,624,000 - $640,000
Working Capital = $1,984,000

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $2,624,000 / $640,000
Current Ratio = 4.10

Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities
Quick Ratio = ($2,624,000 - $1,132,200 - $723,800) / $640,000
Quick Ratio = 1.20

Answer b.

The liquidity of Nilo has improved from the preceding year to the current year. The working capital, current ratio, and quick ratio have all increased. Most of these changes are the result of an increase in current assets relative to current liabilities.