Question

Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio The following account balances are taken from the records of Redon Corp.: Cash Short-term investments Accounts receivable Inventory Prepaid Insurance Accounts payable Taxes payable Salaries and wages payable Short-term loans payable Required: $69,000 58,000 72,000 100,000 10,000 75,000 25,000 40,000 210,000 1. Use the information provided to compute the amount of working capital and Redon's current and quick ratios (round to three decimal points). Use the minus sign to Indicate a negative working capital Working capital Current ratio Quick ratio 2. Determine the effect that each of the following transactions will have on Redon's working capital, current ratio, and quick ratio by recalculating each and then indicating whether the measure is increased, decreased, or not affected by the transaction. Consider each transaction Independently, that is, assume that it is the only transaction that takes place.

Answer 1

Redon Corp Cash Short-term Investments Accounts receivable Inventory Prepaid Insurance Total Current Assets 69,000 58,000 72,000 100,000 10,000 309,000 Accounts payable Taxes payable Salaries and wages payable Short-term loans payable Total Current Liabilties 75,000 25,000 40,000 210,000 350,000 Working Capital Current Assets - Current Liabilities =309,000-350,000 (41,000) Working Capital Current Ratio Current Assets / Current Liabilities =309,000/350,000 0.883 to 1 Current Ratio Quick Ratio (Current Assets - Inventory - Prepaid expenses) / Current Liabilities =(309,000-100,000-10,000)/350,000 =199,000/350,000 0.569 to 1 Quick Ratio

Cash Redon Corp Transaction a Pur inventory on account $17,000 b Pur inventory for cash $14,000 c Paid suppliers on account $30,000 d Received cash on account $40,000 e Paid insurance for next year $20,000 f Made sales on account $70,000 g Repaid short-term loans at bank $25,000 h Borrowed $40,000 at banks for 90 days i Declared and paid $45,000 cash dividend į Pur $20,000 of short-term investments k Paid $30,000 in salaries Accrued additional $15,000 in taxes Wkg Cap Effect on Wkg Cap Current Ratio Effect on Current Quick Ratio Effect on Quick (41,000) None 0.888 Increase 0.542 Decrease (41,000) None 0.883 None 0.529 Decrease (41,000) None 0.872 Decrease 0.528 Decrease (41,000) None 0.883 None 0.569 None (41,000) None 0.883 None 0.511 Decrease 29,000 Increase 1.083 Increase 0.769 | Increase (41,000) None 0.874 Decrease 0.535 Decrease (41,000) None 0.895 Increase 0.613 Increase (86,000)| Decrease 0.754 Decrease 0.440 Decrease (41,000) None 0.883 None 0.569 None (71,000) Decrease 0.797 Decrease 0.483 Decrease (56,000) Decrease 0.847 Decrease 0.545 Decrease Calculation Wkg Cap =(309000+17000)-(350000+17000) =(309000+14000-14000)-350000 =(309000-30000)-(350000-30000) =(309000+40000-40000) -350000 =(309000+20000-20000) -350000 =(309000+70000) -350000 =(309000-25000)-(350000-25000) =(309000+40000)-(350000+40000) =(309000-45000) -350000 =(309000+20000-20000) -350000 =(309000-30000) -350000 =309000-(350000+15000) Current Ratio =(309000+17000)/(350000+17000) =(309000+14000-14000)/350000 =(309000-30000)/(350000-30000) =(309000+40000-40000)/350000 =(309000+20000-20000)/350000 =(309000+70000)/350000 =(309000-25000)/(350000-25000) = (309000+40000)/(350000+40000) =(309000-45000)/350000 =(309000+20000-20000)/350000 =(309000-30000)/350000 =309000/1350000+15000) Quick Ratio =199000/(350000+17000) = (199000-14000)/350000 =(199000-30000)/(350000-30000) =(199000+40000-40000)/350000 =(199000-20000)/350000 =(199000+70000)/350000 =(199000-25000)/(350000-25000) =(199000+40000)/(350000+40000) =(199000-45000)/350000 =(199000+20000-20000)/350000 =(199000-30000)/350000 =199000/(350000+15000) Entry Debit Credit Inventory Accounts Payable Inventory Cash Accounts Payable Cash Accounts receivable Prepaid Insurance Cash Accounts receivable Sales Short-term loans payable Cash Cash Short-term loans payable Dividends Cash Short-term Investments Cash Salaries Cash Taxes expense Taxes payable