Question

Effect of Transactions on Current Position Analysis

Data pertaining to the current position of Lucroy Industries Inc. are as follows:

Cash	$800,000
Marketable securities	550,000
Accounts and notes receivable (net)	850,000
Inventories	700,000
Prepaid expenses	300,000
Accounts payable	1,200,000
Notes payable (short-term)	700,000
Accrued expenses	100,000

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	$
b. Current ratio
c. 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 ratios to one decimal place.

Transaction			Working Capital			Current Ratio			Quick Ratio
a. Sold marketable securities at no gain or loss, $500,000.	$
b. Paid accounts payable, $287,500.
c. Purchased goods on account, $400,000.
d. Paid notes payable, $125,000.
e. Declared a cash dividend, $325,000.
f. Declared a common stock dividend on common stock, $150,000.
g. Borrowed cash from bank on a long-term note, $1,000,000.
h. Received cash on account, $75,000.
i. Issued additional shares of stock for cash, $2,000,000.
j. Paid cash for prepaid expenses, $200,000.

Answer 1

	$
Cuurent Asset
Cash	8,00,000
Marketable securities	5,50,000
Accounts and notes receivable (net)	8,50,000
Inventories	7,00,000
Prepaid expenses	3,00,000
	32,00,000
Current liabilities
Accounts payable	12,00,000
Notes payable (short term)	7,00,000
Accrued expenses	1,00,000
	20,00,000
1. a) Working capital = Current asset - current liability
Working capital = $ 3,200,000 - $ 2,000,000 = $ 1,200,000
b) Current ratio = Current asset / current liability
Current ratio = $ 3,200,000 / $ 2,000,000 = 1.6
c) Quick ratio = Most liquid current asset / current liabilities
Most liquid current assets will include cash and cash equivalient, marketable securities and accounts receivable.
Most liquid currnet asset = $ 2,200,000
So Quick ratio = $ 2,200,000 / $ 2,000,000 = 1.1
2
Transaction	Working Capital	Current Ratio	Quick Ratio	Reason
a. Sold marketable securities at no gain or loss, $500,000.	$ 12,00,000 - $ 5,00,000 = $ 7,00,000	$ 27,00,000 / $ 20,00,000 = 1.35	$ 17,00,000 / $ 20,00,000 = 0.85	Reduction in current asset by $ 5,00,000
b. Paid accounts payable, $287,500.	$ 12,00,000 + $ 2,87,500 = $ $ 14,87,500	$ 32,00,000 / $ 17,12,500 = 1.87	$ 22,00,000 / $ 17,12,500 = 1.28	Reduction in current liability by $ 2,87,500
c. Purchased goods on account, $400,000.	$ 12,00,000	1.6	$ 22,00,000 / $ 24,00,000 = 0.92	No change in WC and CA as both current asset and liability will increase with increase in account spayable and inventory
d. Paid notes payable, $125,000.	$ 12,00,000	1.6	1.1	No change as cash will reduce and notes payable will reduce
e. Declared a cash dividend, $325,000.	$ 12,00,000 + $ 3,25,000 = $ 15,25,000	$ 32,00,000 / $ 23,25,000 = 1.38	$ 22,00,000 / $ 23,25,000 = 0.95	Increase in liability by $ 3,25,000