Question

Data pertaining to the current position of Forte Company follow: Cash $447,500 Marketable securities 180,000 Accounts and notes receivable (net) 325,000 Inventories 700,000 Prepaid expenses 46,000 Accounts payable 210,000 Notes payable (short-term) 240,000 Accrued expenses 300,000 1. Compute (A) the working capital, (B) the current ratio, and (C) the quick ratio. Round ratios to one decimal place. 2. 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 of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place. A. Sold marketable securities at no gain or loss, 60,000. B. Paid accounts payable, 135,000. C. Purchased goods on account, 105,000. D. Paid notes payable, 100,000. E. Declared a cash dividend, 140,000. F. Declared a common stock dividend on common stock, 30,000. G. Borrowed cash from bank on a long-term note, 200,000. H. Received cash on account, 135,000. I. Issued additional shares of stock for cash, 610,000. J. Paid cash for prepaid expenses, 14,000.

Answer 1

Answer(a): Computation of Working Capital:

Working capital = Current Assets - Current Liabilities

Step-(1): Current Assets = Cash + Marketable securities + Accounts receivables + Inventories + Prepaid expenses

Current Assets: 447500 + 180000 + 325000 + 700000 + 46000 = $1698500

Step- (2): Current Liabilities = Accounts payable + Notes payable + Accrued expenses

Current Liabilities: 210000 + 240000 + 300000 = $750000

Step- (3): Working Capital = 1698500 - 750000

Working Capital = $948500

Answer (b): Current Ratio = Current Assets / Current Liabilities

Current Ratio = 1698500 / 750000

Current Ratio = 2.26 or 2.3

Answer (c): Quick Ratio = Quick Assets / Current Laibilities

Quick assets = Cash + Marketable securities + Accounts receivables

Quick Assets = $952500

Quick ratio = 952500 / 750000

Quick ratio = 1.27 or 1.3

Answer (2): Computation of working capital after the transactions:

Transaction	Working capital changes	New Working capital
Sold marketable securities at no gain or loss, 60,000	No changes as cash is coming and marketable securities are going	948500
Paid accounts payable, 135,000	No changes as Accounts payable is decreasing and cash is also decreasing.	948500
Purchased goods on account, 105,000	No change as inventories and accounts payable are increasing.	948500
Paid notes payable, 100,000	No change as cash and notes payable are decreasing.	948500
Declared a cash dividend, 140,000	Will changes as only cash is decreasing	808500
Declared a common stock dividend on common stock, 30,000	It does not effect working capital	948500
Borrowed cash from bank on a long-term note, 200,000	Will change as Cash is increasing	1148500
Received cash on account, 135,000	No change as cash and accounts payable are increasing	948500
Issued additional shares of stock for cash, 610,000	Will change as Cash is increasing	1558500
Paid cash for prepaid expenses, 14,000	Will change as both cash and prepaid expenses are decreasing	920500