Question

Effect of Transactions on Current Position Analysis Data pertaining to the current position of Newlan Company are as follows: Cash $273,500 Temporary investments 140,900 Accounts and notes receivable (net) 414,400 Inventories 492,100 Prepaid expenses 25,900 Accounts payable 181,300 Notes payable (short-term) 259,000 77,700 Accrued expenses Instructions: 1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round the current ratio and the quick ratio to one decimal place. Working capital $1 Current ratio Quick ratio 828,800 2.6 1.6 2. Compute the working capital, the current ratio, and the quick ratio after each of the following transactions, and record the results in the appropriate columns. Consider each transaction separately and assume that only that transaction affects the data given above. Format working capital as whole dollars. Round the current ratio and the quick ratio to one decimal place. Working Capital Current Ratio Quick Ratio 828,800 828,800 828,800 828,800 724,800 Transaction a. Sold temporary investments for cash at no gain or loss, $58,000. b. Paid accounts payable, $104,000. c. Purchased goods on account, $65,000. d. Paid notes payable, $129,500. e. Declared a cash dividend, $104,000. f. Declared a stock dividend on common stock, $31,000. g. Borrowed cash from bank on a long- term note, $259,000. h. Received cash on account, $88,000. i. Issued additional shares of stock for cash, $518,000. j. Paid cash for prepaid expenses, $51,800 859,800 1,087,800 $ 828,800 1,346,800 828,800 2.6

Answer 1

1.

a. Working Capital is the difference between current assets and current liabilities.

b. Current ratio is current assets divided by current liabilities.

c. Quick ratio is current assets-prepaid expenses-inventories divided by current liabilities.

		Amount ($)
	Cash	273,500
	Temporary Investments	140,900
	Accounts and Notes receivables (net)	414,400
	Inventories	492,100
	Prepaid Expenses	25,900
	Total current assets (a)	1,346,800
	Accounts payable	181,300
	Notes Payable (short-term)	259,000
	Accrued expenses	77,700
	Total Current Liabilities (b)	518,000
a	Working Capital (a-b)	828,800
b	Current Ratio (a/b)	2.6
c	Quick ratio = (Current Assets-Inventories-Prepaid Expenses)/Current liabilities	1.6

2.

Working capital, current ratio and quick ratio after the following transactions are as calculated below:

Transaction	Working capital	Current Ratio	Quick Ratio
	A-D	A/D	(A-B-C)/D
a	828,800	2.6	1.6
b	828,800	3.0	1.8
c	828,800	2.4	1.4
d	828,800	3.1	1.8
e	724,800	2.2	1.3
f	828,800	2.6	1.6
g	1,087,800	3.1	2.1
h	828,800	2.6	1.6
i	1,346,800	3.6	2.6
j	828,800	2.6	1.5

Working:

Transaction	Current Assets	Prepaid Expenses	Inventories	Current Liabilities
	A	B	C	D
	1,346,800	25,900	492,100	518,000
a	1,346,800	25,900	492,100	518,000
b	1,242,800	25,900	492,100	414,000
c	1,411,800	25,900	557,100	583,000
d	1,217,300	25,900	492,100	388,500
e	1,346,800	25,900	492,100	622,000
f	1,346,800	25,900	492,100	518,000
g	1,605,800	25,900	492,100	518,000
h	1,346,800	25,900	492,100	518,000
i	1,864,800	25,900	492,100	518,000
j	1,346,800	77,700	492,100	518,000