Effect of transactions on liquidity measures Selected balance sheet accounts for Tibbetts Company on September 30, 2010, are as follows:
Cash | $ 32,000 |
Marketable securities | 58,000 |
Accounts receivable, net | 86,000 |
Inventory | 90,000 |
Prepaid expenses | 14,000 |
Total current assets | $280,000 |
Accounts payable | $ 98,000 |
Other accrued liabilities | 22,000 |
Short-term debt | 40,000 |
Total current liabilities | $160,000 |
Required:
a.Calculate the working capital, current ratio, and acid-test ratio for Tibbetts Company as of September 30, 2010.
b. Summarized here are the transactions/events that took place during the fiscal year ended September 30, 2011. Indicate the effect of each item on Tibbetts Company’s working capital, current ratio, and acid-test ratio. Use + for increase, - for decrease, and (NE) for no effect. (Hint: It may be helpful to use the horizontal model or to record the journal entry(ies) for each item before considering the effects on liquidity measures.)
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Example | Working Capital | Current Ratio | Acid-Test Ratio |
| Paid accounts payable, $195,000. | NE | + | + |
1. | Credit sales for the year amounted to $240,000. The cost of goods sold was $156,000. |
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2. | Collected accounts receivable, $252,000. |
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3. | Purchased inventory on account, $168,000. |
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4. | Issued 250 shares of common stock for $36 per share. |
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5. | Wrote off $7,000 of uncollectible accounts using the allowance for bad debts. |
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6. | Declared and paid a cash dividend, $20,000. |
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7. 8. | Sold marketable securities costing $26,000 for $31,000 in cash. Recorded insurance expense for the year, $12,000. The premium for the policy was paid in June 2010. |
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9. | Borrowed cash on a short-term bank loan, $10,000. |
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10. | Repaid principal of $40,000 and interest of $3,000 on a long-term bank loan. |
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