Question

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

Cash	$	81,000
Marketable securities	$	24,400
Accounts receivable, net	$	376,400
Inventory	$	488,600
Prepaid expenses	$	15,700
Accounts payable	$	219,800
Notes due within one year	$	122,000
Accrued liabilities	$	69,900

During the year, Denna Company completed the following transactions:

Ex. Paid a cash dividend previously declared, $41,000.

1. Issued additional shares of common stock for cash, $222,000.
2. Sold inventory costing $78,800 for $111,000, on account.
3. Wrote off uncollectible accounts in the amount of $14,400, reducing the accounts receivable balance accordingly.
4. Declared a cash dividend, $41,000.
5. Paid accounts payable, $117,600.
6. Borrowed cash on a short-term note with the bank, $76,500.
7. Sold inventory costing $18,300 for $12,200 cash.
8. Purchased inventory on account, $58,250.
9. Paid off all short-term notes due, $198,500.
10. Purchased equipment for cash, $83,800.
11. Sold marketable securities costing $14,400 for cash, $12,000.
12. Collected cash on accounts receivable, $92,100.

Required:

1. Compute the following amounts and ratios as of the beginning of the year:

a. Working capital.

b. Current ratio.

c. Acid-test ratio.

2. 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 (Ex) 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.

Answer 1

1	working Capital
	Current Assets	-	Current Liabilities	working Capital
	$        986,100.00	-	$                 411,700.00	$                                    574,400.00

Current Assets- ($ 81000+ 24400+376400+488600+15700)
Current Liabilities--($ 219800+122000+69900)

2	Current ratio
	Numerator	/	denominator	Inventory Turnover
	Current Assets	/	Current Liabilities	Inventory Turnover
	$        986,100.00	/	$                 411,700.00	2.40	times

3	Acid test ratio
	Numerator	/	denominator	Acid test ratio
	Liquid Assets	/	Current liabilities	Acid test ratio
	$        481,800.00		$                 411,700.00	1.17	to 1
Quick assets- Cash +Accounts Receivables and short term Investments

Effect of transactions
	Working Capital	Current Ratio	Acid-Test ratio
a	Increase	Increase	Increase
b	Increase	Increase	Increase
c	Decrease	Decrease	Decrease
d	Decrease	Decrease	None
e	None	Increase	Increase
f	None	Decrease	Decrease
g	Increase	Increase	Increase
h	None	Decrease	Decrease
i	None	Increase	Increase
j	Decrease	Decrease	Decrease
k	Decrease	Decrease	Decrease
l	None	None	None

Working note
	Current Assets	Current Liabilities	Quick assets	Working capital	Current ratio	Quick ratio
Balance	$      986,100.00	$            411,700.00	$    481,800.00	$       574,400.00	2.40	1.17
A	$      222,000.00		$    222,000.00
Balance	$ 1,208,100.00	$            411,700.00	$    703,800.00	$       796,400.00	2.93	1.71
B	$        32,200.00		$      32,200.00
Balance	$ 1,240,300.00	$            411,700.00	$    736,000.00	$       828,600.00	3.01	1.79
C	$      (14,400.00)		$    (14,400.00)
Balance	$ 1,225,900.00	$            411,700.00	$    721,600.00	$       814,200.00	2.98	1.75
D	$      (41,000.00)
Balance	$ 1,184,900.00	$           411,700.00	$    721,600.00	$       773,200.00	2.88	1.75
E	$   (117,600.00)	$          (117,600.00)	$ (117,600.00)
Balance	$ 1,067,300.00	$            294,100.00	$    604,000.00	$       773,200.00	3.63	2.05
F	$        76,500.00	$              76,500.00	$      76,500.00
Balance	$ 1,143,800.00	$            370,600.00	$    680,500.00	$       773,200.00	3.09	1.84
G	$          5,840.00		$        5,840.00
Balance	$ 1,149,640.00	$            370,600.00	$    686,340.00	$       779,040.00	3.10	1.85
H	$        58,250.00	$              58,250.00
Balance	$ 1,207,890.00	$            428,850.00	$    686,340.00	$       779,040.00	2.82	1.60
I	$   (198,500.00)	$          (198,500.00)	$ (198,500.00)
Balance	$ 1,009,390.00	$            230,350.00	$    487,840.00	$       779,040.00	4.38	2.12
J	$      (83,800.00)		$    (83,800.00)
Balance	$      925,590.00	$            230,350.00	$    404,040.00	$       695,240.00	4.02	1.75
K	$        (2,400.00)		$      (2,400.00)
Balance	$      923,190.00	$            230,350.00	$    401,640.00	$       692,840.00	4.01	1.74
L	$                       -	$                              -	$                     -
Balance	$      923,190.00	$            230,350.00	$    401,640.00	$       692,840.00	4.01	1.74