Question

Effect on transactions on liquidity measures

Selected balance sheet accounts for Tibbets Company on September 30, 2019, are as follows:

Cash $48,000.00

Marketable securities 87,000

Accounts receivable, net 129,000

Inventory 135,000

Prepaid expenses 21,000

total current assets $420,000.00

Accounts Payable $147,000.00

Other accrued liabilities 33,000

Short-term debt 60,000

total current liabilities $240,000.00

Required:

a. Calculate the working capital, current ration, and acid-test ratio for Tibbetts Company as of Sep 30,2019

b. Summarized here are the transactions/events that took place during the fiscal year ended Sep 30,2020. Indicate the effect of each item on Tibbets Co's working capital, current ratio, and acid-test ratio. Use + for increase , - for decrease, and (NE) for no effect. [Hint: It may be helpful to use the horizontal model or to record the journal entry(ies) for each item before considering the effects on liquidity measures.]

Answer 1

a)1) Working capital is calculated as follows:

Particular	$	$
Current Assets: (A)
Cash	48,000
Marketable securities	87,000
Accounts receivable	129,000
Inventory	135,000
Prepaid expenses	21,000
Total current assets		$420,000
Less: Current Liabilities (B)
Accounts Payable	147,000
Other accrued liabilities	33,000
Short-term debt	60,000
Total current liabilities		$240,000
Working Capital (A - B)		$180,000

2)Current Ratio is calculated as follows:

Current Ratio = Total current assets / Total current liabilities

                     = $420,000 / $240,000

                   = 1.75

Current Ratio = 1.75

3) Acid Test Ratio is calculated as follows:

Acid Test Ratio (Quick Ratio) = Quick assets / Total current liabilities

                                           = (Total current assets - (Inventory + Prepaid expenses) / Total current liabilities

                                           = ( $420,000 - ( $135,000 + $21,000) / $240,000

                                           = ($420,000 - $156,000) / $240,000

                                           = $264,000 / $240,000

                                           = 1.1

Acid Test Ratio = 1.1

b) There are no specific transactions /events are specified in the question that took place during the fiscal year ended Sep 30,2020 that will affect on Tibbets Co's working capital, current ratio, and acid-test ratio.