Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio The fo

Question

Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio

The following account balances are taken from the records of Pijet Enterprieses:

Required:

1. Use the information provided to compute the amount of working capital and Pijet's current and quick ratios (round to three decimal points).

2. Determine the effect that each of the following transactions will have on Pijet's working capital, current ratio, and quick ratio by recalculating each and then indicating whether the measure is increased, decreased, or not affected by the transaction. Consider each transaction independently; that is, assume that it is the only transaction that takes place.

Enter all amounts as positive numbers. For the ratios, round to three decimal places.

Cash $69,000 Short-term investments 55,000 Accounts receivable 77,000 Inventory 100,000 Prepaid insurance 10,000 Accounts payable 75,000 Taxes payable 25,000 Salaries and wages payable 40,000 Short-term loans payable 60,000

Explanation / Answer

1) Current Assets = 69000+55000+77000+100000+10000= 311,000

    Current liabilities = 75000+25000+40000+60000 = 200,000

    Working Capital = current assets - current liabilities = 311,000 - 200,000 = $ 111,000

    Current Ratio = current assets/current liabilities = 311,000/200000 = 1.555 to 1

    Quick Ratio = quick assets/current liabilities = (cash+short term investments+receivables)/current liabilities

                         [69000+55000+77000]/200000 = 201,000/200,000 = 1.005

2) effect of each of the transactions is given in the table below:

Sl no effect on working capital effect on current ratio effect on quick ratio a no change decreases to 1.5139:1 decreases 1.0046 to1 b no change no change decreases to 0.935:1 c no change increases to 1.6529:1 increases to 1.0059:1 d no change no change no change e no change no change decreases to 0.905:1 f no change no change increases to 1.35:1 g no change increases to 1.643:1 increases to 1.0057:1 h no change decreases to 1.4625:1 decreases to 1.0042:1 i decreases to $ 66,000 decreases to 1.33:1 decreases to 0.78:1 j no change no change no change k no change increases to 1.6529:1 increases to 1.0059:1 l decreases by $ 15,000 decreases to 1.4465:1 decreases to 0.9349:1

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