Question

Denna Company’s working capital accounts at the beginning of the year follow:

   

Cash	$	73,000
Marketable securities	$	22,000
Accounts receivable, net	$	357,200
Inventory	$	467,800
Prepaid expenses	$	10,100
Accounts payable	$	205,400
Notes due within one year	$	106,000
Accrued liabilities	$	62,700

During the year, Denna Company completed the following transactions:

   

x.	Paid a cash dividend previously declared, $33,000.
a.	Issued additional shares of common stock for cash, $206,000.
b.	Sold inventory costing $72,400 for $103,000, on account.
c.	Wrote off uncollectible accounts in the amount of $11,200, reducing the accounts receivable balance accordingly.
d.	Declared a cash dividend, $33,000.
e.	Paid accounts payable, $104,800.
f.	Borrowed cash on a short-term note with the bank, $64,500.
g.	Sold inventory costing $15,840 for $10,560 cash.
h.	Purchased inventory on account, $52,250.
i.	Paid off all short-term notes due, $170,500.
j.	Purchased equipment for cash, $77,400.
k.	Sold marketable securities costing $12,000 for cash, $10,000.
l.	Collected cash on accounts receivable, $83,300.

   

Required:

1.	Compute the following amounts and ratios as of the beginning of the year: (Round your ratios to 2 decimal places.) a. Working capital b. Current ratio c. Acid-test ratio

         

2.

Indicate the effect of each of the transactions given above on working capital, the current ratio, and the acid-test ratio. Give the effect in terms of increase, decrease, or none. Item (x) is given as an example: Consider each transaction independently and indicate their effects as compared to the ratios and amounts at the beginning of the period. transaction working capital current ratio (effect on) Acid-test Ratio x. Paid a cash dividend previously declared none increase increase a. issued capital stock for cash b. sold inventory for cash c. Wrote off uncollectible accounts d. Declared a cash dividend e. Paid Accounts payable f. borrowed on a short-term note g. sold inventory at a loss h. purchased inventory on account i. paid short-term notes due j. purchased equipment for cash k. sold marketable securities at a loss l. collected accounts recievable

      

Answer 1

		Transaction	Ending Balance
Cash	73,000.00	(44,340.00)	28,660.00
Marketable securities	22,000.00	(12,000.00)	10,000.00
Accounts receivable, net	357,200.00	8,500.00	365,700.00
Quick Assets				404,360.00
Inventory	467,800.00	(35,990.00)	431,810.00
Prepaid expenses	10,100.00		10,100.00
Current Assets				846,270.00
Accounts payable	205,400.00	(52,550.00)	152,850.00
Notes due within one year	106,000.00	(106,000.00)	-
Accrued liabilities	62,700.00	(33,000.00)	29,700.00
Current Liabilities				182,550.00

Numerator	/	Denominator	=	Current Ratio
Current Assets	/	Current Liabilities	=	Current Ratio
846,270.00	/	182,550.00	=	4.64

Numerator	/	Denominator	=	Asid Test Ratio
Quick Assets	/	Current Liabilities	=	Asid Test Ratio
404,360.00	/	182,550.00	=	2.22

Working Capital	=	Current Assets	-	Current Liabilities
Working Capital	=	846,270.00	-	182,550.00
Working Capital	=	663,720.00

transaction	working capital	current ratio (effect on)	Acid-test Ratio
x. Paid a cash dividend previously declared	none	increase	increase
a. issued capital stock for cash	increase	increase	increase
b. sold inventory for cash	Increase	Increase	Increase
c. Wrote off uncollectible accounts	Decrease	Decrease	Decrease
d. Declared a cash dividend	Decrease	Decrease	Decrease
e. Paid Accounts payable	Increase	Increase	Increase
f. borrowed on a short-term note	none	Decrease	Decrease
g. sold inventory at a loss	Decrease	Decrease	Increase
h. purchased inventory on account	none	Decrease	Decrease
i. paid short-term notes due	none	Decrease	Decrease
j. purchased equipment for cash	Decrease	Decrease	Decrease
k. sold marketable securities at a loss	Decrease	Decrease	Decrease
l. collected accounts recievable	none	none	none