Question

Effect of Transactions on Current Position Analysis

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

Cash	$405,000
Marketable securities	187,500
Accounts and notes receivable (net)	310,000
Inventories	750,000
Prepaid expenses	50,000
Accounts payable	210,000
Notes payable (short-term)	245,000
Accrued expenses	320,000

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, $130,000.
c. Purchased goods on account, $125,000.
d. Paid notes payable, $100,000.
e. Declared a cash dividend, $160,000.
f. Declared a common stock dividend on common stock, $55,000.
g. Borrowed cash from bank on a long-term note, $205,000.
h. Received cash on account, $145,000.
i. Issued additional shares of stock for cash, $550,000.
j. Paid cash for prepaid expenses, $8,000.

Answer 1

• All working forms part of the answer
• Working Capita = Total Current Assets – Total Current Liabilities
• Quick Assets = Cash + Marketable Securities + Accounts receivables & notes receivables
• Total Current Assets = Quick Assets + Inventories + Prepaid expense
• Requirement 1 & 2 are done in a combined way, based on above formula.
• Working worksheet for various balances after specific independent transaction:

Transaction		Cash	Marketable Securities	A/R Net	Quick Asset	Inventories	Prepaid Expenses	Total Current Assets	Accounts payable	Notes Payable (ST)	Accrued expense	Total Current Liabilties
	Original	$                       4,05,000.00	$                    1,87,500.00	$                           3,10,000.00	$                        9,02,500.00	$                      7,50,000.00	$                          50,000.00	$                  17,02,500.00	$                     2,10,000.00	$                            2,45,000.00	$                                      3,20,000.00	$                       7,75,000.00
a.	Effect	$                           70,000.00	$                      (70,000.00)		$                                           -			$                                       -				$                                          -
	Balance	$                       4,75,000.00	$                    1,17,500.00	$                           3,10,000.00	$                        9,02,500.00	$                      7,50,000.00	$                          50,000.00	$                  17,02,500.00	$                     2,10,000.00	$                            2,45,000.00	$                                      3,20,000.00	$                       7,75,000.00
b.	Effect	$                     (1,30,000.00)			$                      (1,30,000.00)			$                  (1,30,000.00)	$                  (1,30,000.00)			$                     (1,30,000.00)
	Balance	$                       2,75,000.00	$                    1,87,500.00	$                           3,10,000.00	$                        7,72,500.00	$                      7,50,000.00	$                          50,000.00	$                  15,72,500.00	$                       80,000.00	$                            2,45,000.00	$                                      3,20,000.00	$                       6,45,000.00
c.	Effect				$                                           -	$                      1,25,000.00		$                    1,25,000.00	$                     1,25,000.00			$                       1,25,000.00
	Balance	$                       4,05,000.00	$                    1,87,500.00	$                           3,10,000.00	$                        9,02,500.00	$                      8,75,000.00	$                          50,000.00	$                  18,27,500.00	$                     3,35,000.00	$                            2,45,000.00	$                                      3,20,000.00	$                       9,00,000.00
d.	Effect	$                     (1,00,000.00)			$                      (1,00,000.00)			$                 (1,00,000.00)		$                          (1,00,000.00)		$                     (1,00,000.00)
	Balance	$                       3,05,000.00	$                    1,87,500.00	$                           3,10,000.00	$                        8,02,500.00	$                      7,50,000.00	$                          50,000.00	$                  16,02,500.00	$                     2,10,000.00	$                            1,45,000.00	$                                      3,20,000.00	$                       6,75,000.00
e.	Effect				$                                           -			$                                       -			$                                      1,60,000.00	$                       1,60,000.00
	Balance	$                       4,05,000.00	$                    1,87,500.00	$                           3,10,000.00	$                        9,02,500.00	$                      7,50,000.00	$                          50,000.00	$                  17,02,500.00	$                     2,10,000.00	$                            2,45,000.00	$                                      4,80,000.00	$                       9,35,000.00
f.	Effect				$                                           -			$                                       -			$                                          55,000.00	$                           55,000.00
	Balance	$                       4,05,000.00	$                    1,87,500.00	$                           3,10,000.00	$                        9,02,500.00	$                      7,50,000.00	$                          50,000.00	$                  17,02,500.00	$                     2,10,000.00	$                            2,45,000.00	$                                      3,75,000.00	$                       8,30,000.00
g.	Effect	$                       2,05,000.00			$                        2,05,000.00			$                    2,05,000.00				$                                          -
	Balance	$                       6,10,000.00	$                    1,87,500.00	$                           3,10,000.00	$                      11,07,500.00	$                      7,50,000.00	$                          50,000.00	$                  19,07,500.00	$                     2,10,000.00	$                            2,45,000.00	$                                      3,20,000.00	$                       7,75,000.00
h.	Effect	$                       1,45,000.00		$                         (1,45,000.00)	$                                           -			$                                       -				$                                          -
	Balance	$                       5,50,000.00	$                    1,87,500.00	$                           1,65,000.00	$                        9,02,500.00	$                      7,50,000.00	$                          50,000.00	$                  17,02,500.00	$                     2,10,000.00	$                            2,45,000.00	$                                      3,20,000.00	$                       7,75,000.00
i.	Effect	$                       5,50,000.00			$                        5,50,000.00			$                    5,50,000.00				$                                          -
	Balance	$                       9,55,000.00	$                    1,87,500.00	$                           3,10,000.00	$                      14,52,500.00	$                      7,50,000.00	$                          50,000.00	$                  22,52,500.00	$                     2,10,000.00	$                            2,45,000.00	$                                      3,20,000.00	$                       7,75,000.00
j.	Effect	$                           (8,000.00)			$                            (8,000.00)		$                            8,000.00	$                                       -				$                                          -
	Balance	$                       3,97,000.00	$                    1,87,500.00	$                           3,10,000.00	$                        8,94,500.00	$                      7,50,000.00	$                          58,000.00	$                  17,02,500.00	$                     2,10,000.00	$                            2,45,000.00	$                                      3,20,000.00	$                       7,75,000.00

• Based on above working worksheet balances, Requirements of the question are provided below:

BALANCES	Quick Asset	Total Current Assets	Total Current Liabilities	Working Capital	Current ratio	Quick ratio
As per table above	[A]	[B]	[C]	[B – C]	[B / C]	[A / C]
Original	$                    9,02,500.00	$                         17,02,500.00	$                        7,75,000.00	$                      9,27,500.00	2.2	1.2
a.	$                    9,02,500.00	$                         17,02,500.00	$                        7,75,000.00	$                      9,27,500.00	2.2	1.2
b.	$                    7,72,500.00	$                         15,72,500.00	$                        6,45,000.00	$                      9,27,500.00	2.4	1.2
c.	$                    9,02,500.00	$                         18,27,500.00	$                        9,00,000.00	$                      9,27,500.00	2.0	1.0
d.	$                    8,02,500.00	$                         16,02,500.00	$                        6,75,000.00	$                      9,27,500.00	2.4	1.2
e.	$                    9,02,500.00	$                         17,02,500.00	$                        9,35,000.00	$                      7,67,500.00	1.8	1.0
f.	$                   9,02,500.00	$                         17,02,500.00	$                        8,30,000.00	$                      8,72,500.00	2.1	1.1
g.	$                  11,07,500.00	$                         19,07,500.00	$                        7,75,000.00	$                   11,32,500.00	2.5	1.4
h.	$                    9,02,500.00	$                         17,02,500.00	$                        7,75,000.00	$                      9,27,500.00	2.2	1.2
i.	$                  14,52,500.00	$                         22,52,500.00	$                        7,75,000.00	$                   14,77,500.00	2.9	1.9
j.	$                    8,94,500.00	$                         17,02,500.00	$                        7,75,000.00	$                      9,27,500.00	2.2	1.2