Question

Data pertaining to the current position of Forte Company follow:

Cash	$412,500
Marketable securities	187,500
Accounts and notes receivable (net)	300,000
Inventories	700,000
Prepaid expenses	50,000
Accounts payable	200,000
Notes payable (short-term)	250,000
Accrued expenses	300,000

1.

Compute (A) the working capital, (B) the current ratio, and (C) the quick ratio. Round ratios to one decimal place.

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 of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place. A. Sold marketable securities at no gain or loss, $70,000. B. Paid accounts payable, $125,000. C. Purchased goods on account, $110,000. D. Paid notes payable, $100,000. E. Declared a cash dividend, $150,000. F. Declared a common stock dividend on common stock, $50,000. G. Borrowed cash from bank on a long-term note, $225,000. H. Received cash on account, $125,000. I. Issued additional shares of stock for cash, $600,000. J. Paid cash for prepaid expenses, $10,000.

Answer 1

1) A) Working Capital = Current Assets - Current Liabilities

Current Assets = Cash+Marketable Securities+Accounts and notes receivable+Inventories+Prepaid Expenses

= $412,500+$187,500+$300,000+$700,000+$50,000 = $1,650,000

Current Liabilities = Accounts Payable+Notes payable+Accrued Expenses

= $200,000+$250,000+$300,000 = $750,000

Working Capital = $1,650,000 - $750,000 = $900,000

B) Current Ratio = Current Assets/Current Liabilities

= $1,650,000/$750,000 = 2.2

C) Quick Ratio = Liquid Assets/Current Liabilities

Liquid Assets = Current Assets - Inventories - Prepaid Expenses

= $1,650,000 - $700,000 - $50,000 = $900,000

Quick Ratio = $900,000/$750,000 = 1.2

2) A) Sale of marketable securities will decrease the balance of marketable securities by $70,000 and increase the cash by $70,000. Therefore total current assets remains unaffected. There is also no change in liquid assets and current liabilities with this transaction. Hence working capital, current ratio and quick ratio remains same after this transaction.

Working Capital = $900,000

Current Ratio = 2.2

Quick Ratio = 1.2