Question
Working capital and current ratio
Current assets and current liabilities for Brimstone Company follow:
Line Item Description 20Y4 20Y3
Current assets $1,586,250 $1,210,000
Current liabilities 705,000 550,000
a. Determine the working capital and current ratio for 20Y4 and 20Y3. Round current ratio to 2 decimal places.
Line Item Description 20Y4 20Y3
Working capital $fill in the blank 1
$fill in the blank 2
Current ratio fill in the blank 3
fill in the blank 4
b. Does the change in the current ratio from 20Y3 to 20Y4 indicate a favorable or an unfavorable change?
Current assets and current liabilities for Brimstone Company follow:
Line Item Description 20Y4 20Y3
Current assets $1,586,250 $1,210,000
Current liabilities 705,000 550,000
a. Determine the working capital and current ratio for 20Y4 and 20Y3. Round current ratio to 2 decimal places.
Line Item Description 20Y4 20Y3
Working capital $fill in the blank 1
$fill in the blank 2
Current ratio fill in the blank 3
fill in the blank 4
b. Does the change in the current ratio from 20Y3 to 20Y4 indicate a favorable or an unfavorable change?
Answers
GPT-4o mini
To determine the working capital and current ratio for Brimstone Company for 20Y4 and 20Y3, we can follow these formulas:
1. **Working Capital**:
- Working Capital = Current Assets - Current Liabilities
2. **Current Ratio**:
- Current Ratio = Current Assets / Current Liabilities
Let's calculate these for both years:
### For 20Y4:
- Current Assets: $1,586,250
- Current Liabilities: $705,000
**Working Capital for 20Y4:**
\[
\text{Working Capital}_{20Y4} = \$1,586,250 - \$705,000 = \$881,250
\]
**Current Ratio for 20Y4:**
\[
\text{Current Ratio}_{20Y4} = \frac{\$1,586,250}{\$705,000} \approx 2.25
\]
### For 20Y3:
- Current Assets: $1,210,000
- Current Liabilities: $550,000
**Working Capital for 20Y3:**
\[
\text{Working Capital}_{20Y3} = \$1,210,000 - \$550,000 = \$660,000
\]
**Current Ratio for 20Y3:**
\[
\text{Current Ratio}_{20Y3} = \frac{\$1,210,000}{\$550,000} \approx 2.20
\]
### Summary of Results:
| Line Item Description | 20Y4 | 20Y3 |
|------------------------|----------------|----------------|
| Working Capital | $881,250 | $660,000 |
| Current Ratio | 2.25 | 2.20 |
### b. Change in the Current Ratio:
The current ratio increased from 2.20 in 20Y3 to 2.25 in 20Y4. An increase in the current ratio generally indicates a favorable change, as it suggests that the company has improved its liquidity; it has more current assets available to cover current liabilities. Therefore, the change in the current ratio from 20Y3 to 20Y4 indicates a **favorable change**.
1. **Working Capital**:
- Working Capital = Current Assets - Current Liabilities
2. **Current Ratio**:
- Current Ratio = Current Assets / Current Liabilities
Let's calculate these for both years:
### For 20Y4:
- Current Assets: $1,586,250
- Current Liabilities: $705,000
**Working Capital for 20Y4:**
\[
\text{Working Capital}_{20Y4} = \$1,586,250 - \$705,000 = \$881,250
\]
**Current Ratio for 20Y4:**
\[
\text{Current Ratio}_{20Y4} = \frac{\$1,586,250}{\$705,000} \approx 2.25
\]
### For 20Y3:
- Current Assets: $1,210,000
- Current Liabilities: $550,000
**Working Capital for 20Y3:**
\[
\text{Working Capital}_{20Y3} = \$1,210,000 - \$550,000 = \$660,000
\]
**Current Ratio for 20Y3:**
\[
\text{Current Ratio}_{20Y3} = \frac{\$1,210,000}{\$550,000} \approx 2.20
\]
### Summary of Results:
| Line Item Description | 20Y4 | 20Y3 |
|------------------------|----------------|----------------|
| Working Capital | $881,250 | $660,000 |
| Current Ratio | 2.25 | 2.20 |
### b. Change in the Current Ratio:
The current ratio increased from 2.20 in 20Y3 to 2.25 in 20Y4. An increase in the current ratio generally indicates a favorable change, as it suggests that the company has improved its liquidity; it has more current assets available to cover current liabilities. Therefore, the change in the current ratio from 20Y3 to 20Y4 indicates a **favorable change**.