Dunn Sporting Goods sells athletic clothing and footwear to retail customers. Dunn’s accountant indicates that the firm’s operating cycle averages six months. At December 31, 2011, Dunn has the following assets and liabilities:
a. Prepaid rent in the amount of $8,500. Dunn’s rent is $500 per month.
b. A $9,700 account payable due in 45 days.
c. Inventory in the amount of $46,230. Dunn expects to sell $38,000 of the inventory within three months. The remainder will be placed in storage until September 2012. The items placed in storage should be sold by November 2012.
d. An investment in marketable securities in the amount of $1,900. Dunn expects to sell $700 of the marketable securities in six months. The remainder are not expected to be sold until 2014.
e. Cash in the amount of $1,050.
f. An equipment loan in the amount of $60,000 due in March 2016. Interest of $4,500 is due in March 2012 ($3,750 of the interest relates to 2011, with the remainder relating to the first three months of 2012).
g. An account receivable from a local university in the amount of $2,850. The university has promised to pay the full amount in three months.
h. Store equipment at a cost of $9,200. Accumulated depreciation has been recorded on the store equipment in the amount of $1,250.
Required:
1. Prepare the current asset and current liability portions of Dunn’s December 31, 2011, balance sheet.
2. Compute Dunn’s working capital and current ratio at December 31, 2011.
3. As in investor or creditor, what do these ratios tell you about Dunn’s liquidity?