Answer to Question #242620 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

Solution:

Problem 9:

Working capital = Current assets – Current liabilities

Current ratio = Current assets/Current liabilities

The general condition of working capital can be determined without an actual calculation by looking at the current ratios. The higher the ratio, the higher the value of working capital and vice versa.

The ratio for year 3 will be considered adequate for a restaurant. The benchmark current ratio for restaurants is between 1 and 1.2, which is considered appropriate since it means the business has enough current assets to cover its current liabilities.

 

Problem 10:

The working capital for the period = Current assets – Current liabilities = 86,100 – 62,400 = 23,700

The working capital of a company is composed of its current assets minus its current liabilities.

The main purpose of working capital management is to allow the company to maintain sufficient cash flow to meet its short-term operating costs and debt obligations.