Leaving Cert Business Business Accounts & Ratio Analysis: Use the information in the table

Use the information in the table below and answer the questions which follow: BALANCE SHEET – Brady’s Hotel (Extract) | | 2010 | 2009 | |-------------|----------|----------| | Current Assets | €900,000 | €800,000 | | Current Liabilities | €500,000 | €400,000 | (i) Calculate the Working Capital Ratio for 2010 and 2009 - Leaving Cert Business - Question 8 - 2011

Question 8

Use-the-information-in-the-table-below-and-answer-the-questions-which-follow:--BALANCE-SHEET-–-Brady’s-Hotel-(Extract)--|-------------|-2010-----|-2009-----|-|-------------|----------|----------|-|-Current-Assets---|-€900,000-|-€800,000-|-|-Current-Liabilities-|-€500,000-|-€400,000-|--(i)-Calculate-the-Working-Capital-Ratio-for-2010-and-2009-Leaving Cert Business-Question 8-2011.png

Use the information in the table below and answer the questions which follow: BALANCE SHEET – Brady’s Hotel (Extract) | | 2010 | 2009 | |------... show full transcript

Worked Solution & Example Answer:Use the information in the table below and answer the questions which follow: BALANCE SHEET – Brady’s Hotel (Extract) | | 2010 | 2009 | |-------------|----------|----------| | Current Assets | €900,000 | €800,000 | | Current Liabilities | €500,000 | €400,000 | (i) Calculate the Working Capital Ratio for 2010 and 2009 - Leaving Cert Business - Question 8 - 2011

Step 1

Calculate the Working Capital Ratio for 2010 and 2009.

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Answer

To calculate the Working Capital Ratio (WCR), we use the formula:

$\text{Working Capital Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$

For 2010:

Current Assets: €900,000
Current Liabilities: €500,000

Calculating the ratio:

$\text{WCR}_{2010} = \frac{900,000}{500,000} = 1.8 : 1$

For 2009:

Current Assets: €800,000
Current Liabilities: €400,000

Calculating the ratio:

$\text{WCR}_{2009} = \frac{800,000}{400,000} = 2 : 1$

Step 2

Explain whether the ratio has improved or disimproved.

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Answer

The Working Capital Ratio has disimproved from 2:1 in 2009 (ideal ratio) to 1.8:1 in 2010. This decline indicates that the company may be facing liquidity issues, potentially leading to difficulties in meeting short-term obligations as they become due. A lower ratio suggests the possibility of insufficient current assets to cover current liabilities, raising concerns for the firm’s financial health.

Calculate the Working Capital Ratio for 2010 and 2009.

Explain whether the ratio has improved or disimproved.

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