Question

Effect of Transactions on Current Position Analysis

Data pertaining to the current position of Lucroy Industries Inc. are as follows:

Cash	$425,000
Marketable securities	182,500
Accounts and notes receivable (net)	345,000
Inventories	750,000
Prepaid expenses	48,000
Accounts payable	220,000
Notes payable (short-term)	230,000
Accrued expenses	300,000

Required:

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

a. Working capital	$
b. Current ratio
c. Quick ratio

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. Round ratios to one decimal place.

Transaction	Working Capital		Current Ratio		Quick Ratio
a. Sold marketable securities at no gain or loss, $70,000.	$
b. Paid accounts payable, $140,000.
c. Purchased goods on account, $100,000.
d. Paid notes payable, $115,000.
e. Declared a cash dividend, $130,000.
f. Declared a common stock dividend on common stock, $45,000.
g. Borrowed cash from bank on a long-term note, $205,000.
h. Received cash on account, $105,000.
i. Issued additional shares of stock for cash, $550,000.
j. Paid cash for prepaid expenses, $9,000.

Answer 1

Solution 1:

Current Assets = Cash + Mareketable securities + Accounts and note receivables + Inventories + Prepaid expenses

= $425,000 + $182,500 + $345,000 + $750,000 + $48,000 = $1,750,500

Current liabilities = Accounts payable + Notes Payable + Accrued expenses

= $220,000 + $230,000 + $300,000 = $750,000

Quick Assets = Cash + Mareketable securities + Accounts and note receivables

=  $425,000 + $182,500 + $345,000 = $952,500

a) Working Capital = Current Assets - Current Liablitites = $1,750,500 - $750,000 = $1,000,500

b) Current ratio = Current Assets / Current liabilities = $1,750,500 / $750,000 = 2.3

c) Quick ratio = Quick Assets / Current liabilities = $952,500 / $750,000 = 1.3

Solution 2:

Effect of transaction on ratios
S. No.	Transaction	Working Capital	Current Ratio	Quick Ratio
a.	Sold marketable securities at no gain or loss, $70,000.	$1,000,500.00	2.3	1.3
b.	Paid accounts payable, $140,000.	$1,000,500.00	2.6	1.3
c.	Purchased goods on account, $100,000.	$1,000,500.00	2.2	1.1
d.	Paid notes payable, $115,000.	$1,000,500.00	2.6	1.3
e.	Declared a cash dividend, $130,000.	$870,500.00	2.0	1.1
f.	Declared a common stock dividend on common stock, $45,000.	$1,000,500.00	2.3	1.3
g.	Borrowed cash from bank on a long-term note, $205,000.	$1,205,500.00	2.6	1.5
h.	Received cash on account, $105,000.	$1,000,500.00	2.3	1.3
i.	Issued additional shares of stock for cash, $550,000.	$1,550,500.00	3.1	2.0
j.	Paid cash for prepaid expenses, $9,000.	$1,000,500.00	2.3	1.3