In: Accounting
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
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.