Working Capital Quiz

QUESTIONS

1. A talent agent would be more likely to...

        A) Make a commission

        B) Be paid a monthly retainer

 

2. Sometime it's not enough to consider only the present; an accountant must also consider...

        A) The future cash flows associated with a decision

        B) The past cash flows associated with a decision

 

3. An effective (but not perfect) way of quickly evaluating a company's financial statements is...

        A) Ratio analysis

        B) Budgeting

 

4. The formula for calculating a company's working capital is...

        A) Current Assets - Current Liabilities

        B) Current Assets + Current Liabilities

 

5. The formula for calculating a company's working capital ratio is...

        A) (Current Assets - Current Liabilities) / Current Liabilities

        B) Current Assets / Current Liabilities

 

6. Which working capital ratio would a company rather have?

        A) .5

        B) 1.5

 

7. The acid-test ratio measures...

        A) A company's ability to meet its immediate short-term obligations

        B) A company's likelihood of longterm success

 

8) Which pair of current assets would be excluded from the acid-test ratio calculation?

        A) Inventory, Prepaid Expenses

        B) Cash, Accounts Receivable

 

9) Which of the following is the same exact thing as the working capital ratio?

        A) The Current Ratio

        B) The Debt-Equity Ratio

 

10) Which of the following is the same exact thing as the acid-test ratio?

        A) The Current Ratio

        B) The Quick Ratio

 

ANSWER KEY:

1A, 2A, 3A, 4A, 5B, 6B, 7A, 8A, 9A, 10B

 

PRACTICE PROBLEMS

 

Company X has the following balance sheet:

 1. What is its working capital?

2. What is its working capital (current) ratio?

3. What is its acid-test (quick) ratio?

 

4. Facts about Company Y:

- it has $1 million in assets, and it ONLY has current assets

- it has $300,000 in owners' equity

- its liabilities are split 50% current and 50% noncurrent

What is Company Y's working capital ratio?

 

 

 

ANSWER KEY:

1: Working Capital = Current Assets - Current Liabilities

 ($200,000+$400,000+$90,000+$55,000+$65,000) - $450,000 = $360,000

 

2: Working Capital Ratio = Current Assets / Current Liabilities

 ($200,000+$400,000+$90,000+$55,000+$65,000) / $450,000 = 1.8

 

3. Quick Ratio = Cash + Current Accounts Receivable + Short-Term Investments) / Current Liabilities

($200,000 + $400,000 +$55,000) / $450,000 = 1.5

* Exclude inventory and prepaid expenses from the equation because they cannot be immediately converted into cash

 

 

4. We know that the total liability balance must be equal to $700,000.

Assets = Liabilities + Owners' Equity

$1,000,000 = L + $300,000

L = $700,000

And we know that this is split 50-50 between current and noncurrent. And all of the $1,000,000 asset balance is current.

Working Capital Ratio = Current Assets / Current Liabilities

$1,000,000 / $350,000 = 2.9