Question

Effect of Transactions on Current Position Analysis

Data pertaining to the current position of Newlan Company are as follows:

Cash	$ 80,000
Temporary investments	160,000
Accounts and notes receivable (net)	235,000
Inventories	190,000
Prepaid expenses	10,000
Accounts payable	158,000
Notes payable (short-term)	80,000
Accrued expenses	12,000

Instructions:

1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round the current ratio and the quick ratio to one decimal place.

Working capital		$fill in the blank 1
Current ratio		fill in the blank 2
Quick ratio		fill in the blank 3

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. Consider each transaction separately and assume that only that transaction affects the data given above. Format working capital as whole dollars. Round the current ratio and the quick ratio to one decimal place.

Transaction		Working Capital	Current Ratio	Quick Ratio
a. Sold temporary investments for cash at no gain or loss, $50,000.		$fill in the blank 4	fill in the blank 5	fill in the blank 6
b. Paid accounts payable, $40,000.		$fill in the blank 7	fill in the blank 8	fill in the blank 9
c. Purchased goods on account, $75,000.		$fill in the blank 10	fill in the blank 11	fill in the blank 12
d. Paid notes payable, $30,000.		$fill in the blank 13	fill in the blank 14	fill in the blank 15
e. Declared a cash dividend, $15,000.		$fill in the blank 16	fill in the blank 17	fill in the blank 18
f. Declared a stock dividend on common stock, $24,000.		$fill in the blank 19	fill in the blank 20	fill in the blank 21
g. Borrowed cash from bank on a long-term note, $150,000.		$fill in the blank 22	fill in the blank 23	fill in the blank 24
h. Received cash on account, $72,000.		$fill in the blank 25	fill in the blank 26	fill in the blank 27
i. Issued additional shares of stock for cash, $300,000.		$fill in the blank 28	fill in the blank 29	fill in the blank 30
j. Paid cash for prepaid expenses, $10,000.		$fill in the blank 31	fill in the blank 32	fill in the blank 33

The comparative financial statements of Automotive Solutions Inc. are as follows. The market price of Automotive Solutions Inc. common stock was $119.70 on December 31, 20Y8.

AUTOMOTIVE SOLUTIONS INC. Comparative Income Statement For the Years Ended December 31, 20Y8 and 20Y7
	20Y8		20Y7
Sales	$10,000,000		$ 9,400,000
Cost of goods sold	(5,350,000)		(4,950,000)
Gross profit	$ 4,650,000		$ 4,450,000
Selling expenses	$ (2,000,000)		$(1,880,000)
Administrative expenses	(1,500,000)		(1,410,000)
Total operating expenses	$ (3,500,000)		$(3,290,000)
Operating income	$ 1,150,000		$ 1,160,000
Other revenue and expense:
Other revenue	150,000		140,000
Other expense (interest)	(170,000)		(150,000)
Income before income tax	$ 1,130,000		$ 1,150,000
Income tax expense	(230,000)		(225,000)
Net income	$ 900,000		$ 925,000

AUTOMOTIVE SOLUTIONS INC. Comparative Statement of Stockholders' Equity For the Years Ended December 31, 20Y8 and 20Y7
	20Y8									20Y7
	Preferred Stock			Common Stock			Retained Earnings			Preferred Stock			Common Stock			Retained Earnings
Balances, Jan. 1		$500,000			$500,000			$5,375,000			$500,000			$500,000			$4,545,000
Net income								900,000									925,000
Dividends:
Preferred stock								(45,000)									(45,000)
Common stock								(50,000)									(50,000)
Balances, Dec. 31		$500,000			$500,000			$6,180,000			$500,000			$500,000			$5,375,000

AUTOMOTIVE SOLUTIONS INC. Comparative Balance Sheet December 31, 20Y8 and 20Y7
	Dec. 31, 20Y8		Dec. 31, 20Y7
Assets
Current assets:
Cash	$ 500,000		$ 400,000
Marketable securities	1,010,000		1,000,000
Accounts receivable (net)	740,000		510,000
Inventories	1,190,000		950,000
Prepaid expenses	250,000		229,000
Total current assets	$3,690,000		$3,089,000
Long-term investments	2,350,000		2,300,000
Property, plant, and equipment (net)	3,740,000		3,366,000
Total assets	$9,780,000		$8,755,000
Liabilities
Current liabilities	$ 900,000		$ 880,000
Long-term liabilities:
Mortgage note payable, 10%	$ 200,000		$ 0
Bonds payable, 10%	1,500,000		1,500,000
Total long-term liabilities	$1,700,000		$1,500,000
Total liabilities	$2,600,000		$2,380,000
Stockholders' Equity
Preferred $0.90 stock, $10 par	$ 500,000		$ 500,000
Common stock, $5 par	500,000		500,000
Retained earnings	6,180,000		5,375,500
Total stockholders' equity	$7,180,000		$6,375,000
Total liabilities and stockholders' equity	$9,780,000		$8,755,000

Instructions:

Determine the following measures for 20Y8.

Round ratio values to one decimal place and dollar amounts to the nearest cent. For number of days' sales in receivables and number of days' sales in inventory, round intermediate calculations to the nearest whole dollar and final amounts to one decimal place. Assume there are 365 days in the year.

1. Working capital	$fill in the blank 1
2. Current ratio	fill in the blank 2
3. Quick ratio	fill in the blank 3
4. Accounts receivable turnover	fill in the blank 4
5. Days' sales in receivables	fill in the blank 5	days
6. Inventory turnover	fill in the blank 6
7. Days' sales in inventory	fill in the blank 7	days
8. Debt ratio	fill in the blank 8	%
9. Ratio of liabilities to stockholders' equity	fill in the blank 9
10. Ratio of fixed assets to long-term liabilities	fill in the blank 10
11. Times interest earned	fill in the blank 11	times
12. Times preferred dividends earned	fill in the blank 12	times
13. Asset turnover	fill in the blank 13
14. Return on total assets	fill in the blank 14	%
15. Return on stockholders' equity	fill in the blank 15	%
16. Return on common stockholders' equity	fill in the blank 16	%
17. Earnings per share on common stock	$fill in the blank 17
18. Price-earnings ratio	fill in the blank 18
19. Dividends per share of common stock	$fill in the blank 19
20. Dividend yield	fill in the blank 20	%

Answer 1

1) Working capital = Current assets - current liabilities

( see working below )

Working Capital = 675000 - 250000

Working Capital = 425000

Current Ratio = Current Assets / Current liabilities

Current Ratio = 675000 / 250000

Current Ratio = 2.7

Quick Ratio = ( Current Asserts - Inventories - Prepaid expenses ) / Current liabilities

Quick Ratio = ( 675000 - 190000 - 10000 ) / 250000

Quick Ratio = 475000 / 250000

Quick Ratio = 1.9

Working :

Particular	Amount($)
Cash	80000
Temporary Investments	160000
Accounts and note receivable	235000
Inventories	190000
Prepaid expenses	10000
Total current assets	675000
Accounts payable	158000
Notes Payable ( shortterm )	80000
Accrued expenses	12000
Total current liabilities	250000

2)

Transaction	Working Capital	Current ratio	Quick Ratio
a)	425000	2.7	1.9
b)	425000	3	2.1
		( 635000 / 210000 )	435000 / 210000 )
c)	425000	2.3	1.5
		( 750000 / 325000 )	( 475000 / 325000 )
d)	425000	2.9	2
		( 645000 / 220000 )	( 445000 / 220000 )
e)	410000	2.64	1.84
	( 425000 -15000 )	( 660000 / 250000 )	( 460000 / 250000 )
f)	425000	2.7	1.9
g)	575000	3.3	2.5
	( 425000 + 150000 )	( 825000 / 250000 )	( 625000 / 250000 )
h)	425000	2.7	1.9
i)	725000	3.9	3.1
	( 425000 +300000 )	( 975000 / 250000 )	( 775000 / 250000 )
j)	425000	2.77	1.94
		( 665000 / 240000 )	( 465000 / 240000 )