Riley Manufacturing has a current ratio of 3:1 on December 31, 2018. Indicate wh
ID: 2560857 • Letter: R
Question
Riley Manufacturing has a current ratio of 3:1 on December 31, 2018. Indicate whether each of the following transactions would increase (+), decrease (), or have no effect (NA) on Riley’s current ratio and its working capital.
Current Ratio Working Capital a. Paid cash for a trademark. + + b. Wrote off an uncollectible account receivable. – + c. Sold equipment for cash. + NA d. Sold merchandise at a profit (cash). – + e. Declared a cash dividend. + – f. Purchased inventory on account. + NA g. Scrapped a fully depreciated machine (no gain or loss). – – h. Issued a stock dividend. + NA i. Purchased a machine with a long-term note. – + j. Paid a previously declared cash dividend. NA NA k. Collected accounts receivable. NA NA l. Invested in current marketable securities. NA NAExplanation / Answer
a paid cash for trademark
Current Ratio: Decrease
Working Capital : Decrease
Reason: this will result in cash outflow and hence current Ratio and working capital will decrease
b Wrote off uncollectible Accounts Receivable
Current Ratio: Decrease
Working Capital : Decrease
Reason : Account Receivable is considered for calculating current Ratio and is part of current assets. Further it is also part of working capital. Hence writing off accounts Receivable will result in decrease of both current Ratio and working capital.
C. Sold equipment for cash:-
Current Ratio : Increase
Working Capital : Increase
Reason :this will result in inflow of cash and increase in both current Ratio and working capital.
d. Sold merchandise at a profit (cash)
Current Ratio : Increase
Working Capital :Increase
Reason : Since merchandise is sold for profit the current Ratio and working capital will increase to the extent of profit realised
e. Declared Cash dividend:
Current Ratio : No effect
Working Capital : No effect
Reason :- This will not result in cash outflow till it is paid and hence both current Ratio and working capital will not have any effect.
F. Purchased inventory on account :-
Current Ratio: No effect
Working Capital : No effect
Reason : Since this will result in increase in current assets and also the current liability this will not have any effect on both current Ratio and working capital.
g. Scrapped a fully depreciated machine
Current Ratio: No effect
Working Capital : No effect
Scrapping a fully depreciated machine at no profit or loss will not effect both the current Ratio and the working capital.
H. Issued a stock dividend:
Current Ratio: Decrease
Working Capital : Decrease
Since dividend has been issued it will result in cash outflow and hence decrease in current Ratio and working capital.
I. Purchased machine with long term note:
Current Ratio : No effect
Working capital: No effect
Purchase of machinery with long term note will result in increase in fixed assets and long term liability and hence no impact on current Ratio and working capital.
J. Paid a previously declared cash divided :
Current Ratio: Decrease
Working Capital : Decrease
Since this will result in cash outflow both current Ratio and working capital will decrease.
K. Collected accounts Receivable :
Current Ratio : No effect
Working Capital : No effect
Reason: There will be no effect since cash will increase and account Receivable will decrease. Hence overall there will be no effect.
l. Invested in current marketable securities :
Current Ratio: No effect
Working capital : No effect
Reason :- Since current marketable securities are highly liquid these are considered to be part of current assets. Hence it will not have any effect on current Ratio and the working capital since on one hand cash will decrease and the current ratio but on other hand current assets will Inc will amount invested in current marketable securities. Hence net effect overall will be Nil
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