To determine the working capital and current ratio for Brimstone Company for 20Y4 and 20Y3, we can follow these formulas:
-
Working Capital:
- Working Capital = Current Assets - Current Liabilities
-
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.
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