Question

Effect of Transactions on Current Position Analysis

Data pertaining to the current position of Lucroy Industries Inc. follow:

Cash	$447,500
Marketable securities	187,500
Accounts and notes receivable (net)	300,000
Inventories	750,000
Prepaid expenses	46,000
Accounts payable	210,000
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	$fill in the blank 1
b. Current ratio	fill in the blank 2
c. Quick ratio	fill in the blank 3

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.

1. Transaction	Working Capital		Current Ratio		Quick Ratio
   a. Sold marketable securities at no gain or loss, $80,000.	$fill in the blank 4		fill in the blank 5		fill in the blank 6
   b. Paid accounts payable, $110,000.	$fill in the blank 7		fill in the blank 8		fill in the blank 9
   c. Purchased goods on account, $120,000.	$fill in the blank 10		fill in the blank 11		fill in the blank 12
   d. Paid notes payable, $120,000.	$fill in the blank 13		fill in the blank 14		fill in the blank 15
   e. Declared a cash dividend, $145,000.	$fill in the blank 16		fill in the blank 17		fill in the blank 18
   f. Declared a common stock dividend on common stock, $40,000.	$fill in the blank 19		fill in the blank 20		fill in the blank 21
   g. Borrowed cash from bank on a long-term note, $225,000.	$fill in the blank 22		fill in the blank 23		fill in the blank 24
   h. Received cash on account, $130,000.	$fill in the blank 25		fill in the blank 26		fill in the blank 27
   i. Issued additional shares of stock for cash, $645,000.	$fill in the blank 28		fill in the blank 29		fill in the blank 30
   j. Paid cash for prepaid expenses, $11,000.	$fill in the blank 31		fill in the blank 32		fill in the blank 33

Answer 1

Part 1-

A) working capital

Working capital is the difference between a company’s current assets and current liabilities. It is a financial measure, which calculates whether a company has enough liquid assets to pay its bills that will be due within a year. When a company has excess current assets, that amount can then be used to spend on its day-to-day operations.

Current assets, such as cash and equivalents, inventory, accounts receivable, and marketable securities,prepaid expenses , are resources a company owns that can be used up or converted into cash within a year.

= 447500+187500+300000+750000+46000=$ 1,731,000

Current liabilities are the amount of money a company owes, such as accounts payable, short-term loans, and accrued expenses, that are due for payment within a year.

= 210000+230000+300000=$740,000

Working capital = 1731000-740000=$991,000.

B) current ratio

The current ratio is calculated using two standard figures that a company reports in it's quarterly and annual financial results which are available on a company's balance sheet: current assets and current liabilities. The formula to calculate the current ratio is as follows:

Current Ratio=Current Assets/ Current liabilities

=1731000/740000= 2.34

C) quick ratio

Quick Ratio Calculation

The formula to calculate the quick ratio is:1

= Current assets less inventory less prepaid expenses / current liabilities

= 1731000-750000-46000/740000=1.2635

Part 2-

A) there will no change in the ratios as, when marketable securities are sold, the cash balance increases and simultaneously the marketable securities decreases by $80000.

B) when accounts payable are paid, both cash (current assets) and accounts payable account (current liability) reduces- therefore, nik effect. Hence, ratios remain the same.

C) when we purchase goods on accounts, both the inventory of CA and accounts payable of CL increases, theres fire ratios remain same due to nik effect on the numerator and denominator

D) paid notes payable decreases both cash balance from CA and Notes payable balance from CL- no effect.

E) declaring a cash dividend will not make a difference unless actually paid and transferred to the stock holders. Therefore, we are assuming that only the declaration has been made and not the payment.
we may add the accrued expenses account by the amount if required until actual payment is made.
if the payment were made, the cash balance will reduce and the ratios will change due to change in CA

F) Declared a common stock dividend on common stock, $40,000.

same as above.

G)Borrowed cash from bank on a long-term note, $225,000.

the cash balance will increase:

working capital =1731000+225000 less 740000=$1216000

cUrrent ratio = 1956000/740000=2.64

wuick ratio = 1956000-750000-46000/740000=1.57

H) nil effect as both accounts receivable reduces, cash balance increases

I) cash balance will increase.

working capital =1731000+645000 less 740000=$1636000

cUrrent ratio = 2376000/740000=3.21

wuick ratio = 2376000-750000-46000/740000=2.14

J) paying cash for prepaid expenses, increases the prepaid expenses and reduces cash balance and both being in current assets, it has nil effect on ratios.

Reference: CA = current assets CL = current liab