Answer to Question #242762 in Accounting for Ana

Question

Problem 9.
Assume you were given information regarding current ratios for three consecutive years. Can you determine the general condition of working capital without an actual calculation? If the following ratios apply to a restaurant, would the ratio for year 3 be considered adequate?

Year 1 Year 2 Year 3
Current ratio 1.44:1 1.35:1 1.20:1

State your answer to the questions.


Problem 10.
Total current assets reported for an operation were P86,100 and total current liabilities were P62,400. Determine working capital for the period and define its structure and purpose.

Answer 1

Problem 9

You can determine the general condition of working capital without an actual calculation by the ability to pay debts when they fall due.

The ratio is considered adequate for year 3 since it is higher than 1 meaning the current assets are higher than the current liabilities and thus the company is able to meet its expenses when they fall due. However, the company is not performing well due to continued decrement of the ratio as the year go on.

Problem 10

Working capital is regarded as the difference between the current assets and current liabilities.

Working capital= P86,100-P62,400

Working capital = P23,700

It's structure is healthy for the company given that the current assets are higher than the current liabilities. The purpose of working capital is to cover all of a company's short-term expenses, which are due within one year.