Diane Corporation is preparing its 2012 balance sheet. The company records show the following selected amounts at the end of the
accounting period, December 31, 2012.Total assets $530,000Total noncurrent assets $362,000Liabilities:Notes payable (8%, due in 5 years) $15,000Accounts payable $56,000Income taxes payable $14,000Liability for withholding taxes $3,000Rent revenue collected in advance $7,000Bonds payable (due in 15 years) $90,000Wages payable $7,000Property taxes payable $3,000Note payable (10%, due in 6 months) $12,000Interest payable $400Common stock $100,000Required:1. Compute (a) working capital and (b) the quick ratio (quick assets are $70,000). Why is working capital important to management? How do financial analysts use the quick ratio?2. Would your computations be different if the company reported $250,000 worth of contingent liabilities in the notes to the statements? Explain.
Answer= Net working capital = $65,600
Explanation: The working capital ratio can be determined using the formula: Net working capital = Total current assets - Total current liabilities.
Total current assets: Total current assets = Total assets - Total non-current assets = $530,000 - $362,000 = $168,000.
Total current liabilities include various components: Accounts payable + Income taxes payable + Wages payable + Property taxes payable + Notes payable (Due in 6 months) + Interest payable + Rent revenue collected in advance + Liability for withholding taxes = $56,000 + $14,000 + $7,000 + $3,000 + $12,000 + $400 + $7,000 + $3,000 = $102,400.
Thus, substituting these amounts: Net working capital = $168,000 - $102,400 = $65,600.
Quick ratio = Total quick assets / Total current liabilities = $70,000 / $102,400 = 0.68. Working capital is significant for management as it demonstrates their ability to manage debts and operational funds effectively. The quick ratio, also known as the Acid-test ratio, evaluates a firm's short-term debt-paying ability without considering inventory, thus gauging immediate financial stability. 2) Contingent liabilities could potentially affect calculations if they become probable and estimable since these liabilities should be recorded as such; otherwise, they are merely noted and do not influence immediate balance sheet figures.
a. The working capital totals $65,600.
b. The quick ratio is 68%.
Working capital is crucial for a company's financial management as it reflects its capability to fulfill short-term liabilities. The quick ratio, a liquidity measure, aids analysts in evaluating the firm's capacity to settle short-term obligations using its liquid assets. If $250,000 in contingent liabilities were reported as notes in financial statements, the calculations would remain unchanged since such liabilities have no immediate impact on the balance sheet until they materialize into actual liabilities.
Cash disbursement to clients: $450,000 multiplied by the contract rate of 9% times 1/2 equals $20,250.
Amortization of the premium: $11,795 divided by 6 periods results in $1,966.
Bond interest expense is calculated as: $20,250 minus $1,966 equals $18,284.
The estimated stand-alone selling price of the software, using the expected cost plus margin method, is computed as follows: $65 + (50% of $65) = $65 + $32.50 = $97.50.
<span>If the business opts to raise shirt production by 100 units, the corresponding opportunity cost will be 200 pairs of pants. Should the firm be at point E and choose to boost shirt output by 500 units, the opportunity cost rises to 400 pairs of pants.</span>
