Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio The fo

Question

Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio

The following account balances are taken from the records of Liquiform Inc.:

Required:

1. Use the information provided to compute the amount of working capital and Liquiform's current and quick ratios (round to two decimal points).

2. Determine the effect that each of the following transactions will have on Liquiform's working capital, current ratio, and quick ratio by recalculating each and then indicating whether the measure is increased, decreased, or not affected by the transaction. Consider each transaction independently; that is, assume that it is the only transaction that takes place.

Enter all amounts as positive numbers. For the ratios, round to three decimal places.

Feedback

Working capital and the current ratio both involve current assets and current liabilities. A transaction that causes an equal change in current assets and current liabilities will have no impact on working capital.

Cash $ 70,000 Short-term investments 60,000 Accounts receivable 80,000 Inventory 100,000 Prepaid insurance 10,000 Accounts payable 75,000 Taxes payable 25,000 Salaries and wages payable 40,000 Short-term loans payable 60,000

Explanation / Answer

Cash $70,000 Accounts payable 75,000 Short-term investments 60,000 Taxes payable 25,000 Accounts receivable 80,000 Salaries and wages payable 40,000 Inventory 100,000 Short-term loans payable 60,000 Prepaid insurance 10,000 Total Current Liabilities 200,000 C Total Current Assets 320,000 A Cash $70,000 Short-term investments 60,000 Accounts receivable 80,000 Total Quick Assets $210,000 B 1 Working capital 120,000 A-C Current ratio           1.60 to 1 A÷C Quick ratio           1.05 to 1 B÷C 2 Working Capital Effect on Effect on Effect on Transaction Working Capital Current Ratio Current Ratio Quick Ratio Quick Ratio a. Purchased inventory on account, $20,000 120000 none 1.55 to 1 decrease 0.95 to 1 decrease b. Purchased inventory for cash, $15,000 120000 none 1.60 to 1 none 0.98 to 1 decrease c. Paid suppliers on account, $30,000 120000 none 1.71 to 1 increase 1.06 to 1 increase d. Received cash on account, $40,000 120000 none 1.60 to 1 none 1.05 to 1 none e. Paid insurance for next year, $20,000 120000 none 1.60 to 1 none 0.95 to 1 decrease f. Made sales on account, $60,000 180000 increase 1.90 to 1 increase 1.35 to 1 increase g. Repaid short-term loans at bank, $25,000 120000 none 1.69 to 1 increase 1.06 to 1 increase h. Borrowed $40,000 at bank for 90 days 120000 none 1.50 to 1 decrease 1.04 to 1 decrease i. Declared and paid $45,000 cash dividend 75000 decrease 1.38 to 1 decrease 0.83 to 1 decrease j. Purchased $20,000 of short-term investments 120000 none 1.60 to 1 none 1.05 to 1 none k. Paid $30,000 in salaries 90000 decrease 1.45 to 1 decrease 0.90 to 1 decrease l. Accrued additional $15,000 in taxes 105000 decrease 1.49 to 1 decrease 0.98 to 1 decrease Note: I have tried my best for correct solution still you need further help please ask in comment, Thanks.

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