Question

Effect of Transactions on Current Position Analysis

Data pertaining to the current position of Newlan Company are as follows:

Cash	$328,700
Temporary investments	169,300
Accounts and notes receivable (net)	498,000
Inventories	425,800
Prepaid expenses	22,400
Accounts payable	174,300
Notes payable (short-term)	249,000
Accrued expenses	74,700

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. (I answered this question already)

Working capital		$946,200
Current ratio		2.9
Quick ratio		2

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.

Transaction

Working Capital

Current Ratio

Quick Ratio

a. Sold temporary investments for cash at no gain or loss, $56,000.		$________	_______		_______
b. Paid accounts payable, $100,000.		$________	_______		_______
c. Purchased goods on account, $62,000.		$________	_______		_______
d. Paid notes payable, $124,500.		$________	_______		_______
e. Declared a cash dividend, $100,000.		$________	_______		_______
f. Declared a stock dividend on common stock, $30,000.		$________	_______		_______
g. Borrowed cash from bank on a long-term note, $249,000.		$________	_______		_______
h. Received cash on account, $84,500.		$________	_______		_______
i. Issued additional shares of stock for cash, $498,000.		$________	_______		_______
j. Paid cash for prepaid expenses, $49,800.		$________	_______

Answer 1

1
		Current Assests		$	Current Liabilities		$
	Cash			328700	Accounts payable		174300
	Temporary investments			169300	Notes payable		249000
	Accounts & notes receivable			498000	Accrued expenses		74700
	Inventories			425800
	Prepaid expenses			22400
	TOTAL			1444200			498000
	Working capital = Current assets - current liabilities

                                                   

= 1444200-498000

=946200

Current ratio = current assets /current liabilities

= 1444200/498000

2.9

Quick ratio = Current assets-inventories/current liabilities

=1444200-425800/498000

=2.04

2.

Transaction	Working capital ($)	Current ratio	Quick ratio
a	946200	2.9	2.04
b	946200	3.92	2.60
c	946200	2.9	1.92
d	946200	4.8	3.08
e	846200	2.69	1.84
f	NO effect	NO effect	NO effect
G	1195200	3.4	2.54
h	1030700	3.06	2.21
i	1444200	3.9	3.04
j	946200	2.9	2.04

Explanation to all the transactions

1. Investment account will be debited by $56000 and cash account will be credited by $56000 as investment is sold, net effect on the current assets is nil as amount deducted on one current asset is credited to another current asset by the same amount.

Current asset= 1444200, current liabilities=498000

2. Here is reduction in cash account by $100000 and account payable is also reduced by $100000.

Reduce $100000 from both current assets and current liabilities.

3. Cash is reduced by $62000 and inventories is increased by the same amount.
4. Cash account is reduced by $124500 and decrease the notes payable by the same amount.
5. Reduce the cash account by $100000, current assets will go down by $100000.
6. No effect on any of the accounts. As dividends are issued in form of shares not cash.
7. Cash account will increase by $249000, long term liability will increase by the same amount but long term liability effect will not be considered for working capital, current and quick ratio. So just increase the cash account by $249000
8. Cash account will increase by $84500 rest accounts will remain same
1. Cash account will be increased by $498000 as cash is collected by issue of shares but it will not affect any other accounts because issue of shares is long term finance
10. Increase prepaid expenses account by $49800 and decrease cash account by $49800.