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Worked-example setupScope and assumptions
- Northstar is a fictional nonfinancial US-GAAP teaching entity with an ordinary operating cycle shorter than one year.
- Cash is unrestricted, trade receivables are collectible within the stated cycle, inventory is expected to be sold within that cycle, and all displayed obligations are valid current liabilities.
- The $20,000 payment settles Accounts Payable dollar for dollar with no discount, fee, new borrowing, or other simultaneous transaction.
- The smaller peer uses the same date, USD unit, classification basis, and bounded asset-quality assumptions solely to isolate scale effects.
- Period
- Positions at December 31; immediate pro forma position after the stated payable payment
- Units
- USD; current ratios are unitless
- Rounding
- Whole US dollars; ratios displayed to two decimals but verified from unrounded inputs
Problem
Northstar reports $30,000 Cash, $50,000 Accounts Receivable, $40,000 Inventory, $50,000 Accounts Payable, and $30,000 short-term Debt. It then pays $20,000 Accounts Payable with Cash. A smaller peer reports $20,000 Cash, $25,000 Accounts Receivable, $15,000 Inventory, $15,000 Accounts Payable, and $5,000 short-term Debt. Classify and total the balances, compute both metrics at all three positions, and decide which liquidity conclusions the numbers support.
Verify the classified inputs
Under the stipulated short-cycle facts, Northstar's unrestricted Cash, collectible trade receivables, and operating Inventory are current assets. Accounts Payable and contractually short-term bank debt are current liabilities.
| Northstar at December 31 | Amount |
|---|---|
| Cash | $30,000 |
| Accounts Receivable | 50,000 |
| Inventory | 40,000 |
| Total current assets | $120,000 |
| Accounts Payable | $50,000 |
| Short-term Debt | 30,000 |
| Total current liabilities | $80,000 |
The totals are valid only under those facts. A restriction on Cash, doubtful receivable, unusual operating cycle, or different debt terms would reopen the classification or measurement work.
Compute difference and ratio
Working capital = $120,000 − $80,000 = $40,000
Current ratio = $120,000 ÷ $80,000 = 1.50
Working capital retains dollars. The current ratio is unitless. Neither result is $40,000 or 1.50 of available Cash. All three positions in this example have positive current liabilities; if that denominator were zero, the ratio would be undefined, not evidence of infinite liquidity.
Trace the payable payment
The $20,000 payment reduces Cash and Accounts Payable by equal amounts:
| Northstar position | Current assets | Current liabilities | Working capital | Current ratio |
|---|---|---|---|---|
| Before payment | $120,000 | $80,000 | $40,000 | 1.50 |
| After payment | 100,000 | 60,000 | 40,000 | 1.67 |
The dollar difference is unchanged. The ratio rises. Cash falls from $30,000 to $10,000, while a $20,000 supplier claim is extinguished. “Improved” or “worsened” is not supported without remaining maturity, cash-flow, restriction, and funding facts.
Compare equal working capital at different scale
| Entity | Current assets | Current liabilities | Working capital | Current ratio |
|---|---|---|---|---|
| Northstar before payment | $120,000 | $80,000 | $40,000 | 1.50 |
| Smaller peer | 60,000 | 20,000 | 40,000 | 3.00 |
Equal working capital does not mean equal relative coverage. A 3.00 ratio does not prove the smaller peer is more liquid, either: its $15,000 inventory might be obsolete, its $25,000 receivables overdue, or its $20,000 liabilities due tomorrow. As with the classification caveat above, those are missing facts, not licenses to invent a negative conclusion.
Connect the snapshot to flows
The peer comparison tested scale; Northstar's after-payment position now shows a different limitation, timing. Its $40,000 of working capital and 1.67 current ratio coexist with only $10,000 of Cash. The remaining $50,000 of receivables and $40,000 of inventory may not become Cash at the same speed that the $60,000 of current liabilities comes due.
A serious liquidity review therefore adds operating cash flow, near-term maturities, expected collections and payments, restrictions, seasonality, committed credit, and covenant headroom. It also checks whether every file shares the same entity, date, unit, scope, and version. The ratio is a question generator, not an answer key.
Common wrong paths
- Call working capital Cash: The residual includes noncash assets and subtracts obligations; it is not an asset account.
- Rank by the highest ratio: Composition, timing, business model, and funding evidence remain unexamined.
- Treat unchanged working capital as no transaction: Cash and Payables each fell $20,000.
- Report the ratio in dollars: Division cancels the common currency unit.
- Use a zero denominator as infinity: The statement-derived current ratio is undefined when current liabilities are zero.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · working capital analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- positions
- 3 fields
Inspect data
{
"northstar_after_payment": {
"current_assets": {
"accounts_receivable": 50000,
"cash": 10000,
"inventory": 40000
},
"current_liabilities": {
"accounts_payable": 30000,
"short_term_debt": 30000
}
},
"northstar_reported": {
"current_assets": {
"accounts_receivable": 50000,
"cash": 30000,
"inventory": 40000
},
"current_liabilities": {
"accounts_payable": 50000,
"short_term_debt": 30000
}
},
"smaller_peer": {
"current_assets": {
"accounts_receivable": 25000,
"cash": 20000,
"inventory": 15000
},
"current_liabilities": {
"accounts_payable": 15000,
"short_term_debt": 5000
}
}
}Recomputed result
| Measure | Value |
|---|---|
| northstar after payment current ratio | 1.6667 |
| northstar after payment total current assets | 100,000 |
| northstar after payment total current liabilities | 60,000 |
| northstar after payment working capital | 40,000 |
| northstar reported current ratio | 1.5 |
| northstar reported total current assets | 120,000 |
| northstar reported total current liabilities | 80,000 |
| northstar reported working capital | 40,000 |
| smaller peer current ratio | 3 |
| smaller peer total current assets | 60,000 |
| smaller peer total current liabilities | 20,000 |
| smaller peer working capital | 40,000 |