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Problem 13-3A Transactions, working capital, and liquidity ratios LO P3 Plum Corporation began the month of...

Problem 13-3A Transactions, working capital, and liquidity ratios LO P3 Plum Corporation began the month of May with $1,100,000 of current assets, a current ratio of 2.60:1, and an acid-test ratio of 1.30:1. During the month, it completed the following transactions (the company uses a perpetual inventory system). May 2 Purchased $55,000 of merchandise inventory on credit. 8 Sold merchandise inventory that cost $55,000 for $150,000 cash. 10 Collected $31,000 cash on an account receivable. 15 Paid $29,000 cash to settle an account payable. 17 Wrote off a $5,000 bad debt against the Allowance for Doubtful Accounts account. 22 Declared a $1 per share cash dividend on its 65,000 shares of outstanding common stock. 26 Paid the dividend declared on May 22. 27 Borrowed $90,000 cash by giving the bank a 30-day, 10% note. 28 Borrowed $105,000 cash by signing a long-term secured note. 29 Used the $195,000 cash proceeds from the notes to buy new machinery. Required: Complete the table below showing Plum's (1) current ratio, (2) acid-test ratio, and (3) working capital after each transaction. (Do not round intermediate calculations. Round your ratios to 2 decimal places and the working capitals to nearest dollar amount. Subtracted amount should be indicated with a minus sign.)

Solutions

Expert Solution

1:- current ratio

current ratio shows the company ability to pay their short term obligation like Account payable, salaries payable, dividend payable etc.

Current ratio = current assets/current liabilities

2:- Quick ratio

quick ratio called as acid test ratio ,it is useful to measure company short term liquidity, and using this ratio investors can understand company ability to meet their short term obligation by their quick assets.

Quick ratio = quick assets/current liabilities

3:- working capital

working capital measure the company's efficiency and financial ability of the company in short term.it provides information about liquidity.

Working capital = current assets - current liabilities

* Following table shows the impact of the transaction on current ratio, Acid test ratio, working capital.

Transaction current assets (in$) quick assets (in$) current liabilities (in$) current ratio quick ratio Working capital (in$)
Beginning 1100000 550000 423077 2.60 1.30 676923
2-may 55000 55000
Balance 1155000 550000 478077 2.41 1.15 676923
8-may (55000) 0 0
150000 150000
Balance 1250000 700000 478077 2.61 1.46 771923
10-may 31000 31000 0
(31000) (31000) 0
Balance 1250000 700000 478077

​​​​​2.61

 1.46 771923
15-may (29000) (29000) (29000)
Balance 1221000 671000 449077 2.71 1.49 771923
17-may (5000) (5000)
Balance 1221000 666000 444077 2.74 1.49 776923
22-may 0 0 65000
Balance 1221000 666000 509077 2.39 1.30 711923
26-may (65000) (65000) (65000)
Balance 1156000 601000 444077 1.35 2.60 711923
27-may 90000 90000 90000
Balance 1246000 691000 534077 2.33 1.29 711923
28-may 105000 105000 0
Balance 1351000 796000 534077 2.52 1.49 816923
29-may (195000) (195000) 0
Balance 1156000 601000 534077 2.16 1.12 621923

ekkarill92 answered 3 hours ago
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