Waterway Company's Financial Health: Working Capital and Current Ratio

What is Waterway Company's working capital and current ratio?

a) $54,000 and 0.80:1

b) ($12,000) and 0.80:1

c) $12,000 and 180:1

d) $12,000 and 0.80:1

Answer:

Waterway's Company has a working capital of ($12,000) and a current ratio of 0.80:1, option B.

Working capital is a crucial metric in assessing a company's financial health. It represents the difference between a company's current assets and current liabilities. In the case of Waterway Company, their working capital is calculated as follows:

Working Capital = Current Assets - Current Liabilities

Working Capital = $48,000 - $60,000 = ($12,000)

Therefore, Waterway Company has negative working capital, indicating potential challenges in meeting short-term obligations.

On the other hand, the current ratio is another important financial ratio that measures a company's ability to pay short-term debts with short-term assets. The formula for calculating the current ratio is:

Current Ratio = Current Assets / Current Liabilities

For Waterway Company, the current ratio is:

Current Ratio = $48,000 / $60,000 = 0.80:1

Having a current ratio of 0.80:1 suggests that the company may face difficulties in covering its short-term liabilities.