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In: Accounting

For Evergreen Environmental Engineering (EEE), determine the working capital, current ratio, and acid-test ratio. Evaluate the...

For Evergreen Environmental Engineering (EEE), determine the working capital, current ratio, and acid-test ratio. Evaluate the company’s economic situation with respect to its ability to pay off debts.

EEE Balance Sheet Date ($1000s)

Cash                          $110,000

Securities                       40,000

Accounts Receivable   160,000

Inventories                  250,000

Prepaid Expenses            3,000

Accounts Payable        351,000

Accrued Expenses       89,000

Solutions

Expert Solution

Current Assets = Cash + Securities + Accounts receivable + inventories + Prepaid expenses

                          = $ 110,000 + $ 40,000 + $ 160,000 + $ 250,000 + $ 3,000 = $ 563,000

Current Liabilities = Accounts payable + Accrued Expenses

                                = 351,000 + 89,000 = $ 440,000

Net working capital = Current Assets - Current Liabilities

                                    = $ 563,000 - $ 440,000 = $ 123,000

Current Ratio = Current Assets/Current liabilities

                         = $ 563,000/$ 440,000 = 1.28

Acid-Test Ratio = Cash + Securities + Accounts receivable / Current Liabilities

                            = $ 110,000 + $ 40,000 + $ 160,000/ $ 440,000

                            = $ 310,000/ $ 440,000 = 0.7045 or 0.70

Low Acid- test ratio represents the lack of funds to pay off short-term obligations. Acid- test ratios is less than one, which indicates company is over-leveraged, struggling to maintain or grow sale, paying bills too quickly, or collecting receivable too slowly.


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