IDENTIFYING CURRENT ASSETS AND LIABILITIES 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, 2009, Dunn has the following assets and liabilities:

a. Prepaid rent in the amount of $16,000. Dunn’s rent is $500 per month.

b. A $9,100 account payable due in 45 days.

c. Inventory in the amount of $44,230. Dunn expects to sell $38,000 of the inventory within three months. The remainder will be placed in storage until September 2010. The items placed in storage should be sold by November 2010.

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 2012.

e. Cash in the amount of $350.

f. An equipment loan in the amount of $60,000 of which $10,000 is due in three months. The next $10,000 payment is due in March 2011. Interest of $6,000 is also due with the $10,000 payment due in three months.

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 $8,500. Accumulated depreciation has been recorded on the store equipment in the amount of $1,250.

Required:

Prepare the current asset and current liability portions of Dunn’s December 31, 2009 balance sheet.

Compute Dunn’s working capital and current ratio at December 31, 2009. What do these ratios tell us about Dunn’s liquidity?

Exercise