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Mgmt_200_Spring_2008_solutions_3-21-08(3,24)

Mgmt_200_Spring_2008_solutions_3-21-08(3,24) - Management...

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Management 200 – Introductory Financial Accounting– Spring 2008 Krannert School of Management - Purdue University Solutions to class assignment for March 21, 2008 E9–1. 1 (a) Current assets ........................................................................... $170,100 Current liabilities: Accounts payable ................................................................. $60,000 Income taxes payable ........................................................... 12,000 Liability for withholding taxes ............................................. 3,000 Rent revenue collected in advance ....................................... 14,000 Wages payable ..................................................................... 7,800 Property taxes payable ......................................................... 2,000 Note payable, 10% (due in 6 months) .................................. 10,000 Interest payable .................................................................... 400 (109,200) Working capital ........................................................................ $ 60,900 (b) Current ratio: ($170,100 ÷ $109,200) = 1.56 . Working capital is critical for the efficient operation of a business. Current assets include cash and assets that will be collected in cash within one year or the normal operating cycle of the company. A business with insufficient working capital may not be able to pay its short- term creditors on a timely basis. The current ratio is a measure of liquidity. It helps analysts assess a company’s ability to meet its short-term obligations. 2. No, contingent liabilities are reported in the notes, not on the balance sheet. Therefore, they are not included in the required computations.
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