The following financial data were reported by Mac Company for 2007 and 2008 ($ i

Question

The following financial data were reported by Mac Company for 2007 and 2008 ($ in millions). Mac Company Balance Sheets (partial) 2008 2007 Current assets Cash and cash equivalents $1,997 $1,005 Accounts receivable, net 3,659 2,495 Inventories 3,050 2,589 Other current assets 645 1,175 Total current assets $9,351 $7,264 Current liabilities $7,489 $5,685 Calculate the current ratio and working capital for Mac for 2007 and 2008. Suppose that at the end of 2008 Mac management used $463 million cash to pay off $463 million of accounts payable. Calculate the revised current ratio and working capital?

Explanation / Answer

Current ratio = current assets/current liabilities = 9351/7489 = 1.25 for 2008. For 2007, this is = 7264/5685 = 1.28. Working capital for 2008 = current assets-current liabilities = 9351-7489 = $1862mn. Working capital for 2007 = 7264-5685 = $1579mn. After using $463mn cash, current assets = 9351-463 = $8888mn and current liabilities = 7489-463 = $7026mn. So revised current ratio for 2008 = 8888/7026 = 1.27. Revised working capital for 2008 = 8888-7026=$1862mn

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