Rightway Products had a current ratio of 2 on June 30 of the current year. On that date, the company’s assets were as follows:

Rightway Products had a current ratio of 2 on June 30 of the current year. On that date, the company’s assets were as follows:

Cash	$	75,000
Accounts receivable, net		420,000
Inventory		670,000
Prepaid expenses		9,000
Plant and equipment, net		1,810,000
Total assets	$	2,984,000

Required:

1.	What was the company’s working capital on June 30? (Omit the "$" sign in your response.)

Working capital

$

2.	What was the company’s acid-test ratio on June 30? (Round your answer to 2 decimal places.)

Acid-test ratio

3.	The company paid an account payable of $60,000 immediately after June 30.

a.	What effect did this transaction have on working capital?
	Working capital would not be affected.

b.	What effect did this transaction have on the current ratio?
	Current ratio would increase.

Explanation:

1.

Current assets    ($75,000 + $420,000 + $670,000 + $9,000)	$	1,174,000
Current liabilities ($1,174,000 ÷ 2)		587,000
Working capital	$	587,000

2.

Acid-test radio	=	Cash + Marketable securities + Accounts receivable + Short-term notes
		Current liabilities
	=	$75,000 + $0 + $420,000 + $0	= 0.84 (rounded)
		$587,000

3.

a.

Working capital would not be affected by a $60,000 payment on accounts payable:

Current assets ($1,174,000 – $60,000)	$	1,114,000
Current liabilities ($587,000 – $60,000)		527,000
Working capital	$	587,000

b.

The current ratio would increase if the company makes a $60,000 payment on accounts payable:

Current ratio	=	Current assets
		Current liabilities
	=	$1,114,000	= 2.1 (rounded)
		$527,000