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.

  

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

Explanation / Answer

1. a. Working Capital = Current Assets - Current Liabilities
Current Assets = 60,000 + 28,600 + 326,000 + 434,000 + 6,000 = $854,600
Current Liabilities = 182,000 + 80,000 + 51,000 = $313,000
Working Capital = 854,600 - 313,000 = $541,600

b. Current Ratio = Current Assets / Current Liabilities = 854,600 / 313,000 = 2.73:1

c. Acid-test ratio = Quick Assets / Current Liabilities
Quick Assets = Current Assets - Inventories - Prepaid Expenses = 854,600 - 434,000 - 6,000 = $414,600
Acid-test ratio = 414,600 / 313,000 = 1.32:1

2.

l. Collected accounts receivable = None   None  None

The Effect on Transaction 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 Increase Increase Increase c. Wrote off uncollectible accounts Decrease Decrease Decrease d. Declared a cash dividend Decrease Decrease Decrease 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 Increase h. Purchased inventory on account None Decrease Decrease i. Paid short-term notes due 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

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