Q17E - Horngren'S Financial And Managerial Accounting

Question

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’ working capital each year during 2019 and 2018. What do the calculated changes indicate?

Step-by-Step Solution

Answer

The change in working capital in 2019 is $95,000 and in 2018 is $45,000. The percentage change in working capital in 2019 is 59.38% and in 2018 39.13%

Step 1 Computation of working capital

$\begin{array}{c}\mathrm{Working} \mathrm{capital} \mathrm{of} 2019=\mathrm{Total} \mathrm{current} \mathrm{Assets}-\mathrm{Total} \mathrm{current} \mathrm{liabilities}\\ =\mathrm{\$}490,000-\mathrm{\$}235,000\\ =\mathrm{\$}255,000\end{array}$

$\begin{array}{c}\mathrm{Working} \mathrm{capital} \mathrm{of} 2018=\mathrm{Total} \mathrm{current} \mathrm{Assets}-\mathrm{Total} \mathrm{current} \mathrm{liabilities}\\ =\mathrm{\$}320,000-\mathrm{\$}160,000\\ =\mathrm{\$}160,000\end{array}$

$\begin{array}{c}\mathrm{Working} \mathrm{capital} \mathrm{of} 2017=\mathrm{Total} \mathrm{current} \mathrm{Assets}-\mathrm{Total} \mathrm{current} \mathrm{liabilities}\\ =\mathrm{\$}230,000-\mathrm{\$}115,000\\ =\mathrm{\$}115,000\end{array}$

Step 2 Computation of changes in working capital

$\begin{array}{c}\mathrm{Change} 2019=\mathrm{Current} \mathrm{year} \mathrm{working} \mathrm{capital}-\mathrm{Last} \mathrm{year} \mathrm{working} \mathrm{capital}\\ =\$255,000-\$160,000\\ =\mathrm{\$}95,000\end{array}$

$\begin{array}{c}\mathrm{Change} 2018=\mathrm{Current} \mathrm{year} \mathrm{working} \mathrm{capital}-\mathrm{Last} \mathrm{year} \mathrm{working} \mathrm{capital}\\ =\$160,000-\$115,000\\ =\mathrm{\$}45,000\end{array}$

Step 3 Computation of percentage change in working capital

$\begin{array}{c}\mathrm{Percentage} \mathrm{Change} \mathrm{in} 2019=\left(\frac{\mathrm{Change} \mathrm{in} \mathrm{working} \mathrm{capital}}{\mathrm{Last} \mathrm{year} \mathrm{working} \mathrm{capital}}\right)\times 100\\ =\left(\frac{\$95,000}{\$160,000}\right)\times 100\\ =59.38\mathrm{\%}\end{array}$

$\begin{array}{c}\mathrm{Percentage} \mathrm{Change} \mathrm{in} 2018=\left(\frac{\mathrm{Change} \mathrm{in} \mathrm{working} \mathrm{capital}}{\mathrm{Last} \mathrm{year} \mathrm{working} \mathrm{capital}}\right)\times 100\\ =\left(\frac{\$45,000}{\$115,000}\right)\times 100\\ =39.13\mathrm{\%}\end{array}$

Step 4 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.