Question

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				$424,100			$324,000
Marketable securities				491,000			364,500
Accounts and notes receivable (net)				200,900			121,500
Inventories				982,100			658,800
Prepaid expenses				505,900			421,200
	Total current assets			$2,604,000			$1,890,000
Current liabilities:
Accounts and notes payable
	(short-term)			$359,600			$378,000
Accrued liabilities				260,400			162,000
	Total current liabilities			$620,000			$540,000

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   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   in current assets relative to current liabilities.

Answer 1

Answer a.

Current Year:

Working Capital = Current Assets - Current Liabilities
Working Capital = $2,604,000 - $620,000
Working Capital = $1,984,000

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $2,604,000 / $620,000
Current Ratio = 4.20

Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities
Quick Ratio = ($2,604,000 - $982,100 - $505,900) / $620,000
Quick Ratio = 1.80

Previous Year:

Working Capital = Current Assets - Current Liabilities
Working Capital = $1,890,000 - $540,000
Working Capital = $1,350,000

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $1,890,000 / $540,000
Current Ratio = 3.50

Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities
Quick Ratio = ($1,890,000 - $658,800 - $421,200) / $540,000
Quick Ratio = 1.50

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.