The following table contains selected financial information fo...

Question

The following table contains selected financial information for Tougher Question, Inc.

Table of financial data for Tougher Question, Inc. for current ratio and working capital calculation.

Calculate the current ratio and working capital for TQ, Inc.

Accepted Answer

Alright, let's go ahead and try this question. The following table contains selected financial information for tougher question inc. And it asked us to calculate the current ratio and the working capital, right? But notice in this question, they didn't just tell us straight up like they did in the example. What is our current assets or what are current liabilities? We have to go ahead and figure that out for ourselves. So remember that our current ratio and working capital, they both deal with current assets and current liabilities. The current ratio, current assets divided by current liabilities and working capital is current assets minus current liabilities. So we definitely have to go through here here and we have to select where our current assets and current liabilities are. So let's go account by account. Cash is our first one and we know cash is a current asset, right? Because it's already cash and it's gonna be cash within 1 year because it's already cash. How about the next one? Machinery. Let's go down the list here. Machinery, well that's a long term asset, right? These are fixed assets that we're going to have for multiple years, so that's not a current asset. How about the next one? Accounts receivable. Well, we know accounts receivable. Those are current assets as well, right? Current asset because we're expecting our customers to pay us, in the relative short term. Next one here, short term debt. Well, when you see the word short term, that should be a signal that we're talking about something current, Okay? Whenever it's short term, that means it's a current thing. But what about debt? This isn't a current asset, right? It's debt. It's money we owe. So we're talking about a current liability here. I'll put that one in blue. Let's put our current liabilities in blue. Alright, next, land. What do we think about land? Well land, it's a long term asset, right? It's something we're gonna use for multiple years. It's not a current asset or a current liability. The next one, accrued expenses. Now accrued expenses are current liabilities as well. Remember we talked about these when we did adjusting entries and we made adjustments for time periods, especially with wage expense and salaries, things like that. So crude expenses are current liabilities that we're gonna be paying off in the relative short term. Alright? Let's go on to the other column. Next, we've got inventory. Well, inventory we know is a current asset, right? We're trying to rid of that as soon as possible and get money for it. It's a current asset, we're expecting that to turn into cash soon. How about next? Accounts payable. Well, that is our very first current liability. This is a very common current liability and that is definitely current. This is just money we owe to suppliers, things like that. How about the next one? Common stock. Remember, common stock is an equity account. This is the stock in our company that our shareholders own. That's in the common stock account, so that is equity. That's not current asset or current liability. Bonds payable. Bonds payable are long term debt that we have. We've we've, sold these bonds and we got some money for it and we're eventually gonna have to pay it back. Okay? So these bonds payable are generally long term. Whenever you just see bonds payable, you gotta think of it as long term. It could have some stipulation. It could say bonds payable due in 3 months or something like that and that should trigger that. We're talking about a current liability there, but without any other information, they're long term. Cool? How about prepaid expenses? Well, prepaid expenses are generally current, right? This is maybe when we paid rent in advance or insurance in advance. This is a current asset, right? These are expenses that we paid in advance, but we haven't gotten the benefit for them yet, so they're current assets. We could have long term prepaid expenses, but they would have to tell us in specifically about that. And finally, retained earnings, we know is an equity account, right? This is the equity, this is earnings that we've earned in the past and not paid out to the to the stockholders as dividends, so it still belongs in equity. Cool. So we found all our current assets and current liabilities. Let's go ahead and add them up. Let's start with our current assets. So we had cash of 45,000, We had accounts receivable of 10,000, inventory of 25,000 and prepaid expenses of 15,000. Alright, so let's go ahead and add those up. I'm gonna get a calculator. I don't want to think too much about this 45 plus 10 plus 25 plus 15, that tells us that we've got 95,000 in current assets. Let's go ahead and do our current liabilities now. So what do we got? Short term debt of 40,000. We've got accrued expenses of 35,000, and last is accounts payable of 30,000. So that's all of our current liabilities there. Let's get our number. 40 plus 35 plus 30. Well, that's a 105,000 in current liabilities. Cool. So now, we've got our numbers. We've got our current assets. We've got our current liabilities. Let's go ahead and do our current ratio. And remember, that's current assets divided by current liabilities. So our numerator is 95,000 current assets divided by our denominator of current liabilities, a 105,000. Right? And even without doing the ratio, you can already tell. Right? Those current liabilities are more than our current assets. So we're gonna get something below 1. So let's see what we get. 95 divided by 105. Well, that gives us a ratio of 0 point I'll round it to 2 decimals. 90. Right? Current ratio of 0.90 and what was our threshold, right? We had a threshold for the current ratio at 1, right? So anything below 1, that's a red flag that we've got liquidity problems. And this makes sense. In the coming year, we're going to have to pay out a 105,000. But in the coming year, we're only going to have the equivalent of 95,000 in cash. So how are we going to cover all those? We might have to take on more debt, we might have to call more equity from our stockholders, we're gonna need some more money to cover those. So our current ratio is 0.90. Let's go ahead and do working capital. We'll do it right underneath. Working capital, and remember that's just the subtraction of the 2, right? We're going to do the 95,000 in current assets minus the 105,000 in current liabilities and that gives us a negative 10,000, right? So we've got negative working capital and that gives us that same red flag, right? We've got negative working capital. We might have a problem off our liabilities in the coming year. Cool? So that's how we're gonna be analyzing, these ratios in this class. Current ratio, working capital. These are pretty simple, right? We'll probably do some more complicated ratios as well, but let's go ahead and move on to the next video.

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The following table contains selected financial information for Tougher Question, Inc.

Calculate the current ratio and working capital for TQ, Inc.

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Struggling with Financial Accounting?

The following table contains selected financial information for Tougher Question, Inc.Calculate the current ratio and working capital for TQ, Inc.

Watch next

Ratios: Working Capital and the Current Ratio practice set

The following table contains selected financial information for Tougher Question, Inc.

Calculate the current ratio and working capital for TQ, Inc.