Question

Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio

The following account balances are taken from the records of Liquiform Inc.:

Cash		$ 70,000
Short-term investments		60,000
Accounts receivable		80,000
Inventory		100,000
Prepaid insurance		10,000
Accounts payable		75,000
Taxes payable		25,000
Salaries and wages payable		40,000
Short-term loans payable		60,000

Required:

1. Use the information provided to compute the amount of working capital and Liquiform's current and quick ratios (round to two decimal points).

Working capital	$
Current ratio		to 1
Quick ratio		to 1

2. Determine the effect that each of the following transactions will have on Liquiform's working capital, current ratio, and quick ratio by recalculating each and then indicating whether the measure is increased, decreased, or not affected by the transaction. Consider each transaction independently; that is, assume that it is the only transaction that takes place.

Enter all amounts as positive numbers. For the ratios, round to three decimal places.

Transaction	Working Capital	Effect on Working Capital	Current Ratio	Effect on Current Ratio	Quick Ratio	Effect on Quick Ratio
a. Purchased inventory on account, $20,000	$	none	to 1		to 1
b. Purchased inventory for cash, $15,000	$	none	to 1		to 1
c. Paid suppliers on account, $30,000	$	none	to 1		to 1
d. Received cash on account, $40,000	$	none	to 1		to 1
e. Paid insurance for next year, $20,000	$	none	to 1		to 1
f. Made sales on account, $60,000	$	increase	to 1		to 1
g. Repaid short-term loans at bank, $25,000	$	none	to 1		to 1
h. Borrowed $40,000 at bank for 90 days	$	none	to 1		to 1
i. Declared and paid $45,000 cash dividend	$	decrease	to 1		to 1
j. Purchased $20,000 of short-term investments	$	none	to 1		to 1
k. Paid $30,000 in salaries	$	decrease	to 1		to 1
l. Accrued additional $15,000 in taxes	$	decrease	to 1		to 1

Feedback

Working capital and the current ratio both involve current assets and current liabilities. A transaction that causes an equal change in current assets and current liabilities will have no impact on working capital.

Answer 1

	Cash	$70,000		Accounts payable	75,000
	Short-term investments	60,000		Taxes payable	25,000
	Accounts receivable	80,000		Salaries and wages payable	40,000
	Inventory	100,000		Short-term loans payable	60,000
	Prepaid insurance	10,000		Total Current Liabilities	200,000	C
	Total Current Assets	320,000	A
	Cash	$70,000
	Short-term investments	60,000
	Accounts receivable	80,000
	Total Quick Assets	$210,000	B
1	Working capital	120,000		A-C
	Current ratio	1.60	to 1	A÷C
	Quick ratio	1.05	to 1	B÷C
2		Working Capital	Effect on		Effect on		Effect on
	Transaction		Working Capital	Current Ratio	Current Ratio	Quick Ratio	Quick Ratio
	a. Purchased inventory on account, $20,000	120000	none	1.55 to 1	decrease	0.95 to 1	decrease
	b. Purchased inventory for cash, $15,000	120000	none	1.60 to 1	none	0.98 to 1	decrease
	c. Paid suppliers on account, $30,000	120000	none	1.71 to 1	increase	1.06 to 1	increase
	d. Received cash on account, $40,000	120000	none	1.60 to 1	none	1.05 to 1	none
	e. Paid insurance for next year, $20,000	120000	none	1.60 to 1	none	0.95 to 1	decrease
	f. Made sales on account, $60,000	180000	increase	1.90 to 1	increase	1.35 to 1	increase
	g. Repaid short-term loans at bank, $25,000	120000	none	1.69 to 1	increase	1.06 to 1	increase
	h. Borrowed $40,000 at bank for 90 days	120000	none	1.50 to 1	decrease	1.04 to 1	decrease
	i. Declared and paid $45,000 cash dividend	75000	decrease	1.38 to 1	decrease	0.83 to 1	decrease
	j. Purchased $20,000 of short-term investments	120000	none	1.60 to 1	none	1.05 to 1	none
	k. Paid $30,000 in salaries	90000	decrease	1.45 to 1	decrease	0.90 to 1	decrease
	l. Accrued additional $15,000 in taxes	105000	decrease	1.49 to 1	decrease	0.98 to 1	decrease
Note: I have tried my best for correct solution still you need further help please ask in comment, Thanks.