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Chapter 15: Q17E (page 840)

Data for Research Enterprises follows:

2019

2018

2017

Total current assets

\(490,000

\)320,000

\(230,000

Total current liabilities

\)235,000

\(160,000

\)115,000

Compute the dollar amount of change and the percentage of change in Research Enterprises鈥� working capital each year during 2019 and 2018. What do the calculated changes indicate?

Short Answer

Expert verified

The change in working capital in 2019 is $95,000 and in 2018 is $45,000. The percentage change in working capital in 2019 is59.38% and in 2018 39.13%

Step by step solution

01

Computation of working capital

Workingcapitalof2019=TotalcurrentAssets-Totalcurrentliabilities=$490,000-$235,000=$255,000

Workingcapitalof2018=TotalcurrentAssets-Totalcurrentliabilities=$320,000-$160,000=$160,000

Workingcapitalof2017=TotalcurrentAssets-Totalcurrentliabilities=$230,000-$115,000=$115,000

02

Computation of changes in working capital

Change2019=Currentyearworkingcapital-Lastyearworkingcapital=$255,000-$160,000=$95,000

Change2018=Currentyearworkingcapital-Lastyearworkingcapital=$160,000-$115,000=$45,000

03

Computation of percentage change in working capital

PercentageChangein2019=ChangeinworkingcapitalLastyearworkingcapital脳100=$95,000$160,000脳100=59.38%

PercentageChangein2018=ChangeinworkingcapitalLastyearworkingcapital脳100=$45,000$115,000脳100=39.13%

04

Indication of the calculations.

The change in working capital is increasing which means the company is expanding their operations so the working capital of the company is increasing.

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Most popular questions from this chapter

Question: What are the three main ways to analyze financial statements?

Old Mills鈥檚 income statement appears as follows (amounts in thousands):

Use the following ratio data to complete Old Mills鈥檚 income statement:


1. Inventory turnover is 3.70 (beginning Merchandise Inventory was \(810; ending

Merchandise Inventory was \)770).

2. Profit margin ratio is 14%.

Muscateer Corp. reported the following revenues and net income amounts:

(In millions)2019 2018 2017 2016

Revenue \( 9,610 \) 9,355 \( 9,050 \) 8,950

Net Income 7,290 6,790 5,020 4,300

Requirements

1. Calculate Muscateer鈥檚 trend analysis for revenues and net income. Use 2016 as the

base year, and round to the nearest percent.

2. Which measure increased at a higher rate during 2017鈥�2019?

Net sales revenue, net income, and common stockholders鈥� equity for Eyesight Mission Corporation, a manufacturer of contact lenses, follow for a four-year period.

2019

2018

2017

2016

Net Sales Revenue

\(766000

\)708000

\(644000

\)664000

Net Income

60000

38000

36000

44000

Ending Common Stockholder鈥檚 Equity

368000

352000

326000

296000

Requirements

1.Compute trend analyses for each item for 2017鈥�2019. Use 2016 as the base year, and round to the nearest whole percent.

2.Compute the rate of return on common stockholders鈥� equity for 2017鈥�2019, rounding to three decimal places.

Ross鈥檚 Lipstick Company鈥檚 long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders鈥� equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company鈥檚 lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross鈥檚 management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management鈥檚 intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term鈥攁 current asset. On the controller鈥檚 recommendation, Ross鈥檚 board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross鈥檚 true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross鈥檚 management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.
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