Denna Company’s working capital accounts at the beginning of the year follow: In

Question

Denna Company’s working capital accounts at the beginning of the year follow:

   

   

   

Indicate the effect of each of the transactions given above on working capital, the current ratio, and the acid-test ratio. Give the effect in terms of increase, decrease, or none. Item (x) is given as an example: Consider each transaction independently and indicate their effects as compared to the ratios and amounts at the beginning of the period.

  Cash $ 69,000       Marketable securities $ 25,900       Accounts receivable, net $ 347,600       Inventory $ 457,400       Prepaid expenses $ 7,800       Accounts payable $ 198,200   Notes due within one year $ 98,000       Accrued liabilities $ 59,100

Explanation / Answer

1.

a. Working Capital = Current Assets - Current Liabilities

= $907700 - $355300 = $552400

b. Current ratio = Current Assets / Current Liabilities

= $907700 / $355300 = 2.55

c. Acid Test Ratio = Current Assets - Inventory / Current Liabilities

= $907700-457400 / $355300 = 1.27

Transaction working capital Current ratio acid test ratio a issued capital stock for cash increase increase increase b sold inventory at gain increase increase increase c wrote off uncollectible accounts decrease decrease decrease d declared cash dividend none none none e paid accounts payable none none none f borrowed on a short term note none none none g sold inventory at loss decrease decrease increase h purchased inventory on account none none decrease i paid short term notes none none none j Purchased equipment for cash decrease decrease decrease k sold marketable securities at a loss decrease decrease decrease l Collected amounts receivable none none none

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