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Working Capital Working Capital Working Capital = Current Ratio = Current Ratio = Current Assets - Current Liabilities 2021 $263,000 - $50,000 = $213,000 2022 $347,000 - $69,000 = $278,000 Current Assets Current Liabilities 2021 $263,000 $50,000 5.3:1 = = 5.0:1 2022 $347,000 $69,000

Working Capital Working Capital Working Capital = Current Ratio = Current Ratio = Current Assets - Current Liabilities 2021 $263,000 - $50,000 = $213,000 2022 $347,000 - $69,000 = $278,000 Current Assets Current Liabilities 2021 $263,000 $50,000 5.3:1 = = 5.0:1 2022 $347,000 $69,000

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter16: Financial Planning And Forecasting
Section: Chapter Questions
Problem 2P: AFN EQUATION Refer to Problem 16-1. What additional funds would be needed if the companys year-end...
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B. Working Capital = Current Assets - Current Liabilities 2021 = Working Capital $263,000 - $50,000 $213,000 2022 Working Capital = $347,000 $69,000 = $278,000 Current Ratio = Current Assets Current Liabilities 2021 2022 Current Ratio = $263,000 $50,000 $347,000 $69,000 = 5.3:1 5.0:1 Debt to Total Assets = Total Liabilities Total Assets 2021 2022 = $180,000 $382,000 $184,000 $487,000 = 47.1% 37.8% C. The working capital has increased between 2021 and 2022, indicating greater liquidity for the firm in its ability to pay its current liabilities as they become due. The current ratio has decreased between 2021 and 2022; however, it is still quite high. Note also that there is a substantial portion of the current assets in cash and accounts receivable, which may be converted into cash quickly (assuming the receivables are collectible). The company, therefore, should not have any problems in paying its current liabilities as they become due. The debt to total assets indicates the percentage of assets financed by creditors. The debt to total assets for Doogie's Dry-Cleaning Inc. was 47.1% in 2021, with, this number improving (falling) between 2021 and 2022 to 37.8%. Most of the debt is long-term, and thus the firm should not have any problems with solvency in the near future. Overall, the company appears to be in good shape, with sufficient current assets to pay its liabilities as they become due. It can also manage the current levels of debt adequately.
Transcribed Image Text:B. Working Capital = Current Assets - Current Liabilities 2021 = Working Capital $263,000 - $50,000 $213,000 2022 Working Capital = $347,000 $69,000 = $278,000 Current Ratio = Current Assets Current Liabilities 2021 2022 Current Ratio = $263,000 $50,000 $347,000 $69,000 = 5.3:1 5.0:1 Debt to Total Assets = Total Liabilities Total Assets 2021 2022 = $180,000 $382,000 $184,000 $487,000 = 47.1% 37.8% C. The working capital has increased between 2021 and 2022, indicating greater liquidity for the firm in its ability to pay its current liabilities as they become due. The current ratio has decreased between 2021 and 2022; however, it is still quite high. Note also that there is a substantial portion of the current assets in cash and accounts receivable, which may be converted into cash quickly (assuming the receivables are collectible). The company, therefore, should not have any problems in paying its current liabilities as they become due. The debt to total assets indicates the percentage of assets financed by creditors. The debt to total assets for Doogie's Dry-Cleaning Inc. was 47.1% in 2021, with, this number improving (falling) between 2021 and 2022 to 37.8%. Most of the debt is long-term, and thus the firm should not have any problems with solvency in the near future. Overall, the company appears to be in good shape, with sufficient current assets to pay its liabilities as they become due. It can also manage the current levels of debt adequately.
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