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.

      

  Cash $ 61,000       Marketable securities $ 28,300       Accounts receivable, net $ 328,400       Inventory $ 436,600       Prepaid expenses $ 6,200       Accounts payable $ 183,800   Notes due within one year $ 82,000       Accrued liabilities $ 51,900

Explanation / Answer

working capital at the beginning of the year is =

61000+28300+328400+436600-183000 -82000-51900 = 537400

current ration in the beginning of the year is =    61000+28300+328400+436600=854300 divided by 316900 (183000+82000+51900) is 2.69 : 1

acide test ration in the beginning : 61000+28300+328400=417700/316900 (82000+51900+183000) =1.31 : 1

Closing balances after transactions

ACCOUNTS PAYABLE = 98200( 183800-85600)

NORES DUE                 =    0 PAID (82000+46500 INTEREST)

ACCRUED LIABILTIEIS      =30900 ( 51900-21000)

SHARES                     = 182000

PROFIT =                           -9000 (28200-6400-21000-6750-3050)

ASSETS SIDE =

Cash =    194150 ( 61000+182000+91000+46500+13500+15250+70100-21000-21000-85600-43250-46500-67800)

Marketable sec = 10000 = (28300-18300)

debtors = 251900 (328400-6400-70100)

inventories =396800 (436600-62800-20250+43250)

prepaid = 6200

equipment = 67800

working capital is

194150+10000+251900+396800=852850

- (98200+30900+46500) = 175600

= 682650 ( 852850-175600)

Working capital ration i s 852850/175600 = 4.85 : 1

Acid test ratio is =       (194150+10000+251900)/175600

=456050/175600 = 2.59 : 1

Effects : working capital increase from 537400 to 852850

Current ratio incrsee from 2.69 :1 to 4.85 : 1

Acid test ration : 1.31 :1 to 2.59 :1

conclusion = during the period liquidity improved.

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