Roost and Sing Corp.\'s CFO has decided to take a closer look at the firm\'s sho

ID: 2795865 • Letter: R

Question

Roost and Sing Corp.'s CFO has decided to take a closer look at the firm's short-term assets and liabilities. Roost and Sing Corp.'s balance sheet follows Balance Sheet Cash Accounts receivable Inventory Total current assets $150,000 90,000 $100,000 $340,000 Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total common equity Total liabilities and equity $130,000 $75,000 $125,000 $330,000 $460,000 $200,000 $990,000 Net plant and equipment $650,000 990,000 Total assets The value of Roost and Sing Corp.'s working capital is , while its net working capital is The value of Roost and Sing Corp.'s net operating working capital is Roost and Sing Corp.'s current ratio is If Roost and Sing Corp. decides to purchase inventory with long-term debt, its current ratio will

Explanation / Answer

ANSWER A

Calculation of net working capital=current asset –current liability

Current asset

cash

150000

Accounts receivable

90000

inventory

100000

Total current asset(A)

340000

Current liabilities

Account payable

130000

Accrual

75000

Note payable(B)

125000

Total current liabilities

330000

NET WORKING CAPITAL (A-B)

$10000

Gross Working capital sometimes refer to total of current asset but most of the time working capital and net working capital refer as current asset-current liability. In this question as both are asked separately so gross working capital=$340000 and net working capital=$10000

ANSWER B

NET OPERATING WORKING CAPITAL=OPERATING CURRENT ASSET –OPERATING CURRENT LIABILITIES

Operating assets are assets which can be converted into cash within one year, operating current liabilities are liabilities which are expected to settle within 12 months. In this question cash, A/R and inventories are operating asset while A/P, accrual are net operating liability (Since note payable is interest bearing liability it will not be included in net operating liability)

NOWC=340000-205000=$135000

ANSWER C

CURRENT RATIO=CURRENT ASSET/CURRENT LIABILTY

=340000/330000=1.030

ANSWER D

When long term debt is use to purchase inventory there will be decrease in current ratio as long term liability of 100000 will be paid off early

Current asset=340000/ (330000+100000)

=0.7906