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

Question

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

   

   

   

Compute the following amounts and ratios as of the beginning of the year: (Round your ratios to 2 decimal places.)

2.

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 $ 84,000       Marketable securities $ 25,300       Accounts receivable, net $ 383,600       Inventory $ 496,400       Prepaid expenses $ 17,800       Accounts payable $ 225,200   Notes due within one year $ 128,000       Accrued liabilities $ 72,600

Explanation / Answer

The Effect on Transaction Working Capital Current Ratio Acid-Test Ratio Remarks 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 Increase Increase Increase As Cash balance will increase c. Wrote off uncollectible accounts None None None As Net Accounts receivable will be same d. Declared a cash dividend Decrease Decrease Decrease As Cash do not change but current laibility of dividend payable increases e. Paid accounts payable None Increase Increase f. Borrowed on a short-term note None Decrease Decrease g. Sold inventory at a loss Decrease Decrease Decrease As Cash balance will decrease h. Purchased inventory on account None Decrease Decrease i. Paid short-term notes None Increase Increase j. Purchased equipment for cash Decrease Decrease Decrease k. Sold marketable securities at a loss Decrease Decrease Decrease l. Collected accounts receivable None None None As Current Assets remain same

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