Question

Effect of Transactions on Current Position Analysis

Data pertaining to the current position of Lucroy Industries Inc. follow:

Cash	$450,000
Marketable securities	175,000
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses	44,000
Accounts payable	200,000
Notes payable (short-term)	240,000
Accrued expenses	310,000

Compute the working capital, the current ratio, and the quick ratio after each of the following transactions and record the results in the appropriate columns. Consider each transaction separately and assume that only that transaction affects the data given. Round ratios to one decimal place.

Transaction	Working Capital		Current Ratio		Quick Ratio
a. Sold marketable securities at no gain or loss, $60,000.	$
b. Paid accounts payable, $145,000.	$
c. Purchased goods on account, $135,000.	$
d. Paid notes payable, $100,000.	$
e. Declared a cash dividend, $145,000.	$
f. Declared a common stock dividend on common stock, $60,000.	$
g. Borrowed cash from bank on a long-term note, $210,000.	$
h. Received cash on account, $115,000.	$
i. Issued additional shares of stock for cash, $640,000.	$
j. Paid cash for prepaid expenses, $14,000.	$

Answer 1

Working capital = current assets – current liabilities

Current ratio = current assets / current liabilities

Quick ratio = quick assets/ current liabilities

Part A

Current assets

Cash (450000+175000)	620,000
Marketable securities (175000-175000)	0
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses	44,000
Total current assets	1754000

Quick assets

Cash (450000+175000)	620,000
Marketable securities (175000-175000)	0
Accounts and notes receivable (net)	340,000
Total quick assets	960000

Current liabilities

Accounts payable	200,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	750000

Working capital = 1754000-750000 = 1004000

Current ratio = 1754000/750000 = 2.3

Quick ratio = 960000/750000 = 1.3

Part B

Current assets

Cash (450000-145000)	305,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses	44,000
Total current assets	1309000

Quick assets

Cash (450000-145000)	305,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Total quick assets	820000

Current liabilities

Accounts payable (200000-145000)	55,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	605000

Working capital = 1309000-605000 = 704000

Current ratio = 1309000/605000 = 2.2

Quick ratio = 820000/605000 = 1.6

Part C

Current assets

Cash	450000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Inventories (750000+135000)	885,000
Prepaid expenses	44,000
Total quick assets	1894000

Quick assets

Cash	450000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Total current assets	965000

Current liabilities

Accounts payable (200000+135000)	335,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	885000

Working capital = 1894000-885000 = 1009000

Current ratio = 1894000/885000 = 2.1

Quick ratio = 965000/885000 = 1.1

Part D

Current assets

Cash (450000-100000)	350,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses	44,000
Total current assets	1659000

Quick assets

Cash (450000-100000)	350,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Total quick assets	865000

Current liabilities

Accounts payable	200000
Notes payable (short-term) (240000-100000)	140,000
Accrued expenses	310,000
Total current liabilities	650000

Working capital = 1659000-650000 = 1009000

Current ratio = 1659000/650000 = 2.6

Quick ratio = 865000/650000 = 1.3

Part E

Current assets

Cash (450000-145000)	305,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses	44,000
Total current assets	1614000

Quick assets

Cash (450000-145000)	305,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Total quick assets	820000

Current liabilities

Accounts payable	200,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	750000

Working capital = 1614000-750000 = 864000

Current ratio = 1614000/750000 = 2.2

Quick ratio = 820000/750000 = 1.1

Part F

Current assets

Cash	450,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses	44,000
Total current assets	1759000

Quick assets

Cash	450,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Total current assets	965000

Current liabilities

Accounts payable	200,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	750000

Working capital = 1759000-750000 = 1009000

Current ratio = 1759000/750000 = 2.3

Quick ratio = 965000/750000 = 1.3

Part G

Current assets

Cash (450000+210000)	660,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses	44,000
Total current assets	1969000

Quick assets

Cash (450000+210000)	660,000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Total current assets	1175000

Current liabilities

Accounts payable	200,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	750000

Working capital = 1969000-750000 = 1219000

Current ratio = 1969000/750000 = 2.6

Quick ratio = 1175000/750000 = 1.6

Part H

Current assets

Cash (450000+115000)	565,000
Marketable securities	175000
Accounts and notes receivable (net) (340000-115000)	225,000
Inventories	750,000
Prepaid expenses	44,000
Total current assets	1759000

Quick assets

Cash (450000+115000)	565,000
Marketable securities	175000
Accounts and notes receivable (net) (340000-115000)	225,000
Total quick assets	965000

Current liabilities

Accounts payable	200,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	750000

Working capital = 1759000-750000 = 1009000

Current ratio = 1759000/750000 = 2.3

Quick ratio = 965000/750000 = 1.3

Part I

Current assets

Cash (450000+640000)	1090000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses	44,000
Total current assets	2399000

Quick assets

Cash (450000+640000)	1090000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Total quick assets	1605000

Current liabilities

Accounts payable	200,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	750000

Working capital = 2399000-750000 = 1649000

Current ratio = 2366000/750000 = 3.2

Quick ratio = 1605000/750000 = 2.1

Part H

Current assets

Cash (450000-14000)	436000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Inventories	750,000
Prepaid expenses (44000+14000)	58,000
Total current assets	1759000

Quick assets

Cash (450000-14000)	436000
Marketable securities	175000
Accounts and notes receivable (net)	340,000
Total quick assets	951000

Current liabilities

Accounts payable	200,000
Notes payable (short-term)	240,000
Accrued expenses	310,000
Total current liabilities	750000

Working capital = 1759000-750000 = 1009000

Current ratio =1759000/750000 = 2.3

Quick ratio = 951000/750000 = 1.3