Working Capital and Short Term Liquidity Ratios Bell Company

Working Capital and Short Term Liquidity Ratios Bell Company has a current ratio of 2.85 (2.85:1) on December 31. On that date the company\'s current assets are as follows: Cash Short-term investments Accounts receivable (net Inventory $16,400 49,000 169,000 200,000 11,600 $446,000 Prepaid expenses Current assets Bell Company\'s current liabilities at the beginning of the year were $137,000 and during the year its operating activities provided a cash flow of $55,000 a. What are the firm\'s current liabilities on December 31? Round answer to the nearest whole number 156,491 b. What is the firm\'s working capital on December 31? Round answer to the nearest whole number 289,509 V C. What is the quick ratio on December 31? Round answer to 2 decimal places. 1.5 d. What is the Bell\'s operating-cash-flow-to-current-liabilities ratio? Round answer to 2 decimal places. Check

Solution

Ans.

a.) Current Ratio is used to measure entity\'s ability to pay its current liabilities.

Current Ratio = Current Assets/Current Liabilities

Current Ratio = 2.85

Current Assets = $446,000

Current Liabilities = 446,000/2.85 = $156,491

b.) Working capital is the difference between its current assets and current liabilities, which is used in business to run its daily operations smoothly.

Working Capital = Current Assets- Current Liabilities

= 446,000-156,491 = $289,509

c.) Quick ratio is used to evaluate that how quickly an entity can pay its current liabilities. In this ratio calculation current assets which in form of cash or equivalent or which can be easily converted into cash are used.

Quick Ratio = (Cash + Accounts Receivable + Short Term Investments)/ Current Liabilities

= (16,400+49,000+169,000)/ 156,491 = 1.5

d.) Operating Cash Flow to Current liability ratio is used to calculate that can an entity is able to pay its short term liabilities from cash genrated through operation during the year.

Opearting Cash flow ratio = Operating Cash flow / Current Liabilities

= 55,000/156,491 = 0.35

Since this ratio is less than 1, Company is not able to pay its current liabilities throgh operating cash.