Question

Problem 13-14A Effects of Transactions on Various Ratios [LO13-2]

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

   

Cash	$	71,000
Marketable securities	$	22,000
Accounts receivable, net	$	352,400
Inventory	$	462,600
Prepaid expenses	$	8,700
Accounts payable	$	201,800
Notes due within one year	$	102,000
Accrued liabilities	$	60,900

During the year, Denna Company completed the following transactions:

   

x.	Paid a cash dividend previously declared, $31,000.
a.	Issued additional shares of common stock for cash, $202,000.
b.	Sold inventory costing $70,800 for $101,000, on account.
c.	Wrote off uncollectible accounts in the amount of $10,400, reducing the accounts receivable balance accordingly.
d.	Declared a cash dividend, $31,000.
e.	Paid accounts payable, $101,600.
f.	Borrowed cash on a short-term note with the bank, $61,500.
g.	Sold inventory costing $15,420 for $10,280 cash.
h.	Purchased inventory on account, $50,750.
i.	Paid off all short-term notes due, $163,500.
j.	Purchased equipment for cash, $75,800.
k.	Sold marketable securities costing $12,000 for cash, $10,000.
l.	Collected cash on accounts receivable, $81,100.

   

Required:

1.	Compute the following amounts and ratios as of the beginning of the year: (Round your ratios to 2 decimal places.)

         

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 (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.

      

Answer 1

1(a) Computation of Working Capital
Particulars	Amount	Amount
Current Assets
Cash	$71,000.00
Marketable securities	$22,000.00
Accounts receivable, net	$352,400.00
Inventory	$462,600.00
Prepaid expenses	$8,700.00	$916,700.00
Current Liabilities
Accounts payable	$201,800.00
Notes due within one year	$102,000.00
Accrued liabilities	$60,900.00	$364,700.00
Working Capital (A-B)		$552,000.00

1(b) Current Ratio= Current Assets/ Current Liabilities

= 916700/364700

=2.5:1

1( c)Acid test ratio= Liquid Assets / Current Liabilities

=(916700-8700-462600)/364700= 1.22:1

Liquid Assets= Current Assets- Inventory-prepaid expenses

=916700-462600-8700

Part-2 : Statement showing Effect of each Transaction
S.no	Effect of each transactions	Effect on W.C.	Effect on Current ratio	Effect on Acid test ratio
1	Paid a cash dividend previously declared, $31,000.	No effect	Increase	Increase
2	Issued additional shares of common stock for cash, $202,000.	Increase	Increase	Increase
3	Sold inventory costing $70,800 for $101,000, on account.	Increase	Increase	Increase
4	Wrote off uncollectible accounts in the amount of $10,400, reducing the accounts receivable balance accordingly.	Decrease	Decrease	Decrease
5	Declared a cash dividend, $31,000.	Decrease	Decrease	Decrease
6	Paid accounts payable, $101,600.	No effect	Increase	Increase
7	Borrowed cash on a short-term note with the bank, $61,500.	No effect	Decrease	Decrease
8	Sold inventory costing $15,420 for $10,280 cash.	Decrease	Decrease	Increase
9	Purchased inventory on account, $50,750.	No effect	Decrease	Decrease
10	Paid off all short-term notes due, $163,500.	No effect	Increase	Increase
11	Purchased equipment for cash, $75,800.	Decrease	Decrease	Decrease
12	Sold marketable securities costing $12,000 for cash, $10,000.	Decrease	Decrease	Decrease
13	Collected cash on accounts receivable, $81,100.	No effect	no effect	no effect