Questions: Working capital and current ratio Current assets and current liabilities for Brimstone Company follow: - 20Y4 20Y3 - Current assets 1,586,250 1,210,000 - Current liabilities 705,000 550,000 a. Determine the working capital and current ratio for 20 Y 4 and 20 Y 3. Round current ratio to 2 decimal places. - 20Y4 20Y3 - Working capital - Current ratio b. Does the change in the current ratio from 20 Y 3 to 20 Y 4 indicate a favorable or an unfavorable change?

To solve this problem, we need to calculate the working capital and current ratio for Brimstone Company for the years 20Y4 and 20Y3.

Working Capital:

Working capital is calculated as the difference between current assets and current liabilities.

• For 20Y4: \[ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} = \$1,586,250 - \$705,000 = \$881,250 \]

• For 20Y3: \[ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} = \$1,210,000 - \$550,000 = \$660,000 \]

Current Ratio:

The current ratio is calculated by dividing current assets by current liabilities.

• For 20Y4: \[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{\$1,586,250}{\$705,000} \approx 2.25 \]

• For 20Y3: \[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{\$1,210,000}{\$550,000} \approx 2.20 \]

The table with the calculated values is as follows:

\[ \begin{tabular}{lll} & 20Y4 & 20Y3 \\ \hline Working capital & \$881,250 & \$660,000 \\ Current ratio & 2.25 & 2.20 \\ \end{tabular} \]

The current ratio increased from 2.20 in 20Y3 to 2.25 in 20Y4. An increase in the current ratio generally indicates a favorable change, as it suggests that the company has improved its ability to cover its short-term liabilities with its short-term assets. This improvement in liquidity is typically seen as a positive sign of financial health.