Question

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Effect of transactions on current position analysis

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 to one decimal place.

Working Capital: $

Current Ratio:

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 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.

Transaction	Working Capital	Current Ratio	Quick Ratio
a.	$
b.
c.
d.
e.
f.

Answer 1

1.Working capital=Current assets-current liabilities

Current assets=Cash+Accounts and note receivables(net)+Marketable securities+Inventories+prepaid expense

Current assets=$412,500+300,000+$187,500+$700,000+$50,000

Current assets=$1,650,000

Current liabilities=Accounts payable+Accrued expenses+notes payable(short term)

Current liabilities=$200,000+$300,000+$250,000

Current liabilities=$750,000

So, Working capital=$1,650,000-$750,000

Working capital=$900,000

Current ratio=Current assets/current liabilities

$1,650,000/$750,000

Current ratio=2.2 times

Quick ratio=(Cash+Accounts and note receivables(net)+Marketable securities)/Current liabilities

Quick ratio=($412,500+300,000+$187,500)/$750,000

Quick ratio=$900,000/$750,000

Quick ratio=1.2 times

2.

a. Current asset would not be affected by sale at no gain or loss , thus working capital will be the same and also quick ratio and current ratio would also remain the same.

b. Accounts payable paid will reduce the current assets and current liabilities by $125,000

So, Current assets=$1,650,000-$125,000=$1,525,000

Current liabilities=$750,000-$125,000=$625,000

Thus,

Working capital=$1,525,000-$625,000=$900,000

Current ratio=$1,525,000/$625,000=2.4

Quick ratio=($900,000-$125,000)/$625,000

Quick ratio=1.2

c.Purchased goods on account would increase the current liabilities and current asset by $110,000

So, Current assets=$1,650,000+$110,000=$1,760,000

Current liabilities=$750,000+$110,000=$860,000

Thus,

Working capital=$1,760,000-$860,000=$900,000

Current ratio=$1,760,000/$860,000=2.0 times

Quick ratio=$900,000+/$860,000=1.0 times

d.Notes payable paid would decrease the current liabilities and current assets by $100,000

So, Current assets=$1,650,000-$100,000=$1,650,000

Current liabilities=$750,000-$100,000=$650,000

Thus,

Working capital=$1,550,000-$650,000=$900,000

Current ratio=$1,550,000/$650,000=2.4 times

Quick ratio=($900,000-$100,000)+/$650,000=1.2 times

e.Declaring a cash dividend will only increase current liability by $150,000

So, Current assets=$1,650,000

Current liabilities=$750,000+$150,000=900,00

Thus,

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

Current ratio=$1,650,000/$900,000=1.8 times

Quick ratio=$900,000+/$900,000=1 times

f. Declaration of common stock dividend of $50,000 will have no effect on working capital, current ratio or quick ratio.Thus, no change.

g.Borrowed cash from bank on a long term note will increase only the current assets by $225,000

So, Current assets=$1,650,000+$225,000=$1,875,000

Current liabilities=$750,000

Thus,

Working capital=$1,875,000-$750,000=$1,125,000

Current ratio=$1,875,000/$750,000=2.5 times

Quick ratio=($900,000+$225,000)+/$750,000=1.5 times

h.If cash is received on account ,it will have no effect on working capital, current ratio or quick ratio, all will remain the same.

i. Issue of additional 600,000 shares would increase the current assets by 600,000.

So, Current assets=$1,650,000+600,000=$2,250,000

Current liabilities=$750,000

Thus,

Working capital=$2,250,000-=$750,000=$1,500,000

Current ratio=$2,250,000/$750,000=3 times

Quick ratio=($900,000+600,000)+/$750,000=2 times

j. Cash paid for prepaid expense will not effect the working capital,current ratio or quick ratio.Thus, no change.