4. Denna Company\'s working capital accounts at the beginning of the year follow

Question

4. Denna Company's working capital accounts at the beginning of the year follow $ 62,000 $ 28,000 $ 330,800 $ 439,200 $ 6,400 $ 185,600 $ 84,000 $ 52,800 Accounts receivable, net Prepaid expenses Accounts payable Notes due within one year Accrued liabilities During the year, Denna Company completed the following transactions: x. Paid a cash dividend previously declared, $22,000 a. Issued additional shares of common stock for cash, $184,000. b. Sold inventory costing $63,600 for $92,000, on account. c. Wrote off uncollectible accounts in the amount of $6,800, reducing the accounts receivable balance d. Declared a cash dividend, $22,000. e. Paid accounts payable, $87,200 f. Borrowed cash on a short-term note with the bank, $48,000 g. Sold inventory costing $21,900 for $14,600 cash. h. Purchased inventory on account, $44,000 i. Paid off all short-term notes due, $132,000 j. Purchased equipment for cash, $68,600. k. Sold marketable securities costing $18,000 for cash, $15,000 I. Collected cash on accounts receivable, $71,200 Required: 1. Compute the following amounts and ratios as of the beginning of the year: (Round your ratios to 2 decimal places.) a. Working capital b. Current ratio

Explanation / Answer

Denna Company All Amounts in $ Computation of Amounts and Ratios at the beginning of the year 1. a. Working Capital = Current Assets - Current Liabilities Current Assets Cash 62000 Marketable Securities 28000 Accounts Receivable, Net 330800 Inventory 439200 Prepaid Expenses 6400 Total Current Assets 866400 Current Assets excluding Inventory 427200 Current Liabilities Accounts Payable 185600 Notes due within one year 84000 Accrued Liabilities 52800 Total Current Liabilities 322400 Working Capital = $ 866,400 - $ 322,400 = $ 544,000. b. Current Ratio = Current Assets / Current Liabilities = $ 866,400 / $ 322,400 = 2.69 : 1 c. Acid-Test Ratio = (Current Assets - Inventory) / Current Liabilities = $ 427,200 / $ 322,400 = 1.33 : 1 2. Effect of Transactions on Working Capital, Current Ratio and Acid-Test Ratio Transactions The Effect On Working Capital Current Ratio Acid-Test Ratio x Paid a Cash dividend previously declared None Increase Increase a. Issued capital stock for cash Increase Increase Increase b. Sold inventory at a gain None None None c. Wrote off uncollectible accounts Decrease Decrease Decrease d. Declared a cash dividend Decrease Decrease Decrease e. Paid accounts payable Decrease None None f. Borrowed on a short-term note None None None g. Sold inventory at a loss None None None h. Purchased Inventory on Account None Increase Increase i. Paid short-term notes Decrease None None j. Purchased equipment for cash Decrease Decrease Decrease k. Sold marketable securities at a loss None None None l. Collected Accounts Receivable None Decrease Decrease

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