Question

1. Use the following current asset and current liability section of Company X’s balance sheets at January 31, 2015 and 2014 (in millions):

	January 31, 2015	January 31, 2014
Current Assets
Cash	$5	$2
Accounts Receivable	3	6
Inventories	6	10
Total current assets	$14	$18
Current Liabilities
Note Payable	$3	$3
Accounts Payable	4	1
Other accrued liabilities	2	2
Total current liabilities	$9	$6

1. Calculate the working capital and current ratio at each balance sheet date. Round your current ratio answers to two decimal places.
   
   
   
   
   
2. If Company X collected $2 of accounts receivable on January 31, 2015, what impact, if any, would it have on working capital and current ratio calculations?

Answer 1

a.

Date: 31/01/2014:

Working capital = Total current assets – Total current liabilities

                           = $18 - $6

                           = $12 million (Answer)

Current ratio = Total current assets / Total current liabilities

                        = $18 / $6

                        = 3.00 (Answer)

Date: 31/01/2015:

Working capital = Total current assets – Total current liabilities

                           = $14 - $9

                           = $5 million (Answer)

Current ratio = Total current assets / Total current liabilities

                        = $14 / $9

                        = 1.56 (Answer)

b.

Answer: If the amount is collected from accounts receivable, there would be no change in working capital and current ratio in the year 2015.

Explanation: It indicates collection of cash from the receivable account. Both cash and receivable are in current assets section. Such collection of $2 decreases the receivable account but increases cash by the same amount, making the total current assets become unchanged. Once there is no change in total current asset, there would be no change in working capital and current ratio.