Question

Problem 14-14 Effects of Transactions on Various Ratios [LO14-2]

Denna Company’s working capital accounts at the beginning of the year follow:

Cash	$	61,000
Marketable securities	$	28,300
Accounts receivable, net	$	328,400
Inventory	$	436,600
Prepaid expenses	$	6,200
Accounts payable	$	183,800
Notes due within one year	$	82,000
Accrued liabilities	$	51,900

During the year, Denna Company completed the following transactions:

Ex. Paid a cash dividend previously declared, $21,000.

1. Issued additional shares of common stock for cash, $182,000.
2. Sold inventory costing $62,800 for $91,000, on account.
3. Wrote off uncollectible accounts in the amount of $6,400, reducing the accounts receivable balance accordingly.
4. Declared a cash dividend, $21,000.
5. Paid accounts payable, $85,600.
6. Borrowed cash on a short-term note with the bank, $46,500.
7. Sold inventory costing $22,200 for $14,800 cash.
8. Purchased inventory on account, $43,250.
9. Paid off all short-term notes due, $128,500.
10. Purchased equipment for cash, $67,800.
11. Sold marketable securities costing $18,300 for cash, $15,250.
12. Collected cash on accounts receivable, $70,100.

Required:

1. Compute the following amounts and ratios as of the beginning of the year:

a. Working capital.

b. Current ratio.

c. Acid-test ratio.

2. Indicate the effect of each of the transactions given above on working capital, the current ratio, and the acid-test ratio. Give the effect in terms of increase, decrease, or none. Item (Ex) is given as an example. Consider each transaction independently and indicate their effects as compared to the ratios and amounts at the beginning of the period.

Answer 1

ANSWER:

Computation of the amounts and ratios as of the beginning of the year

1)

a) Working Capital

Working capital = Current Assets - Current liability

= (61,000+28,300+328,400+436,600+6,200) - (183,800+82,000+51,900)

= 860,500-317,700

= $542,800

b) Current Ratio

Current ratio = Current Assets / Current liabilities

= (61,000+28,300+328,400+436,600+6,200) / (183,800+82,000+51,900)

= 860,500 / 317,700

= 2.7085

c) Acid test ratio:

Acid test ratio = (Total current Assets - Inventory - Prepaid expenses) / Current liability

= (860,500 - 436,600- 6,200)/ 317,700

= 1.3148

2)

Effect of each of the given transactions on working capital, the current ratio, and the acid-test ratio

	Transaction	Working Capital	Current Ratio	Acid-Test Ratio
x.	Paid a cash dividend previously declared	None	Increase	Increase
a.	Issued capital stock for cash	Increase	Increase	Increase
b.	Sold inventory at a gain	Increase	Increase	Increase
c.	Wrote off uncollectible accounts	Decrease	Decrease	Decrease
d.	Declared a cash dividend	Decrease	Decrease	Decrease
e.	Paid accounts payable	None	None	None
f.	Borrowed on a short-term note	None	None	None
g.	Sold inventory at a loss	Decrease	Decrease	Increase
h.	Purchased inventory on account	None	None	Decrease
i.	Paid short-term notes	None	None	None
j.	Purchased equipment for cash	Decrease	Decrease	Decrease
k.	Sold marketable securities at a loss	Decrease	Decrease	Decrease
l.	Collected accounts receivable	None	None	None