Working capital : This is the financial metric which evaluates the ability of a company to pay off the short-term debt obligations. It is the balance of current assets, after current liabilities are deducted. Formula of working capital: Working capital = Current assets – Current liabilities Current ratio : The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company. Formula of current ratio: Current ratio = Current assets Current liabilities Debt to assets ratio : This financial ratio evaluates the ability of a company to pay off long-term debt obligations owed to creditors. This ratio assesses the solvency of a company. Formula of debt to assets ratio: Debt to assets ratio = Total liabilities Total assets Free cash flow : This measure evaluates the cash-generating capacity of a company from its operating activities, after paying capital expenditures and dividends. Formula of free cash flow: Free cash flow = { Net cash provided by operating activities– Capital expenditures– Dividends } To compute : (1) Working capital, (2) Current ratio (3) Debt to assets ratio, (4) Free cash flow of Incorporation A and Incorporation W for 2014

Question

General Account

Answer 1

Question

Chapter 2, Problem 2.3EYCT

(a)

To determine

Working capital: This is the financial metric which evaluates the ability of a company to pay off the short-term debt obligations. It is the balance of current assets, after current liabilities are deducted.

Formula of working capital:

Working capital = Current assets – Current liabilities

Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Formula of current ratio:

Current ratio = Current assetsCurrent liabilities

Debt to assets ratio: This financial ratio evaluates the ability of a company to pay off long-term debt obligations owed to creditors. This ratio assesses the solvency of a company.

Formula of debt to assets ratio:

Debt to assets ratio = Total liabilitiesTotal assets

Free cash flow: This measure evaluates the cash-generating capacity of a company from its operating activities, after paying capital expenditures and dividends.

Formula of free cash flow:

Free cash flow = {Net cash provided by operating activities–Capital expenditures–Dividends}

To compute: (1) Working capital, (2) Current ratio (3) Debt to assets ratio, (4) Free cash flow of Incorporation A and Incorporation W for 2014

(b)

To determine

To analyze: The liquidity and solvency position of two companies based on the computed ratios

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Students have asked these similar questions

General Account

Provide correct answer general Accounting question

Accounting Cycle Review 15 a-e Carla Vista Corporation's trial balance at December 31, 2020, is presented below. All 2020 transactions have been recorded except for the items described below. Debit Credit Cash Accounts Receivable Inventory $27,400 59,000 22,600 Land 62,900 Buildings 96,900 Equipment 42,000 Allowance for Doubtful Accounts $430 Accumulated Depreciation-Buildings 30,500 Accumulated Depreciation-Equipment 15,000 Accounts Payable 19,300 Interest Payable -0- Dividends Payable Unearned Rent Revenue -0- 8,800 Bonds Payable (10%) 54,000 Common Stock ($10 par) 34,000 Paid-in Capital in Excess of Par-Common Stock 6,800 Preferred Stock ($20 par) -0- Paid-in Capital in Excess of Par-Preferred -0- Stock Retained Earnings 72,970 Treasury Stock -0- Cash Dividends Sales Revenue Rent Revenue Bad Debt Expense Interest Expense Cost of Goods Sold Depreciation Expense Other Operating Expenses Salaries and Wages Expense -0- 576,000 -0- -0- -0- 404,000 -0- 39,900 63,100 Total Unrecorded…