Question

Decort Company's working capital accounts at December 31, 2012, are given below:

Current Assets:
Cash		$100,000
Marketable Securities		50,000
Accounts Receivable	$250,000
Less Allowance for Doubtful Accounts	(20,000)	230,000
Inventory, LIFO		300,000
Prepaid		8,000
Total Current Assets		$688,000
Current Liabilities:
Accounts Payable		$200,000
Notes Payable		50,000
Taxes Payable		10,000
Accrued Liabilities		30,000
Total Current Liabilities		$290,000

During 2013, DeCort Company completed the following transactions:

Purchased fixed assets for cash, $20,000.

Exchanged DeCort Company common stock for land. Estimated value of transaction, $80,000.

Payment of $40,000 on short-term notes payable.

Sold marketable securities costing $20,000 for $25,000 cash.

Sold DeCort Company common stock for $70,000.

Wrote off an account receivable in the amount of $20,000.

Declared a cash dividend in the amount of $5,000.

Paid the above cash dividend.

Sold inventory costing $10,000 for $15,000 cash.

Sold inventory costing $5,000 for $8,000 on account.

Paid accounts payable in the amount of $20,000.

Sold marketable securities costing $20,000 for $20,000 cash.

Issued a credit memo on an account receivable, $1,000.

Compute the following as of December 31, 2012:

Working capital

Current ratio

Acid-test ratio (conservative)

Cash ratio

(These ratios are to be computed using only the December 31, 2012 data.)

For 2013, indicate the effect of each of the transactions given on working capital, current ratio, acid-test ratio, and cash ratio. Give the effect in terms of +, , or none. Consider each transaction to be the first transaction of the year. Assume at the start of the year that the current ratio is over 2 to 1, the acid-test ratio is over 1 to 1, and the cash ratio is less than 1 to 1.

Format:

The Effect On

	Working	Current	Acid-Test	Cash
Transaction	Capital	Ratio	Ratio	Ratio

Answer 1

1. Calculation of Working Capital
	USD
Current Assets:
Cash	100,000
Marketable Securities	50,000
Accounts Receivable after deducting allowance for Doubtful accounts	230,000
Inventory	300,000
Prepaid	8,000
Total Current Assets	688,000
Current Liabilities
Accounts Payable	200000
Notes Payable	50000
Taxes Payable	10000
Accrued Liabilities	30000
Total Current Liabilities	290000
Working Capital = Current Assets Minus Current Liabilities	398,000
Calculation of Current Ratio
Current ratio is calculated by dividing current assests by current Liabilites
Current Assets	688000
Current Liabilites	290000
Current Ratio	2.37:1
Calculation of Acid Test Ratio
Acid test ratio = Quick Assets (Current assets- Stocks-Prepaid Expenses)/Current liabilites
Cash	100000
Marketable Securities	50000
Accounts Receivable	230000
	380000
Current Liabilities	290000
Acid test ratio	1.3
Cash Ratio = Cash plus marketable secruities/ Current Liabilites
Cash	100000
Marketable secruities	50000
	150000
Current Liabilites	290000
Cash Ratio	0.52