The following are operating transactions that occur during the current year. Analyze each transaction and explain...

The following are operating transactions that occur during the current year. Analyze each transaction and explain if the transaction will increase, decrease, or have no effect on the working capital.

Please explain each answer fully

a. Company purchased inventory on account, $5800; terms 2/10,n/30

b. Company borrowed $55,000 in a long term note.

c. Old equipment with a book value of $2200 is sold for $1325

d. marketable securities are sold at a gain of $4800

e. Company paid $4200 for insurance covering one year from the date of purchase

Solutions

Expert Solution

a. If the inventory is purchased in the cash basis then there will be no effect on the working capital beacuse there will be increase and decrease on the current asset side which will sow nil effect on the working capital but here it is purchased on the credit basis which was purchased in the credit basis which will decrease the working capital. Here amount which will effect the working capital will be decided by the payback period if the company pays back within 10days they will receive 2% discount or if they pays back by 30days they will receive n% discount.

b. It will show no effect on the working capital beacuse the amount which was borrowed by the company was on a long note which means it comes under long term liability. as we know working capital is calculated by taking the difference between the current assets and current liabilities.

c. There will be increase of working capital by $1325 because here old equipment is a fixed asset which doesnt effect the working capital but the amount which we received in the form of cash or bank will increase the current assets which will effect the working capital

d. Marketable securities are also considered as current assets but this transaction will show nil effect if it was sold at cost but here it was sold at gain of $4800 which will increase the value of the cash and cash equivalents. There will be increase of $ 4800 in the working capital.

e. If the insurance is assumed as current investment then there will no effect on the working capital because here the current investment is increasing and cash and cash equivalents is decreasing so there is no increase or decrease of current assets if the investment is assumed as other than current investment then there will be decrease of $4200 in the working capital because there will decrease in the current asset. As here tenure is mentioned as 1year it will be consider as current aseet and there will be no effect in the working capital

ekkarill92 answered 1 year ago

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