Problem 14-14 Effects of Trans
Problem 14-14 Effects of Transactions on Various Ratios[LO14-2]
Denna Company’s working capital accounts at the beginning of theyear follow:
| Cash | $ | 61,000 |
| Marketable securities | $ | 28,300 |
| Accounts receivable, net | $ | 328,400 |
| Inventory | $ | 436,600 |
| Prepaid expenses | $ | 6,200 |
| Accounts payable | $ | 183,800 |
| Notes due within one year | $ | 82,000 |
| Accrued liabilities | $ | 51,900 |
During the year, Denna Company completed the followingtransactions:
Ex. Paid a cash dividend previously declared,$21,000.
- Issued additional shares of common stock for cash,$182,000.
- Sold inventory costing $62,800 for $91,000, on account.
- Wrote off uncollectible accounts in the amount of $6,400,reducing the accounts receivable balance accordingly.
- Declared a cash dividend, $21,000.
- Paid accounts payable, $85,600.
- Borrowed cash on a short-term note with the bank, $46,500.
- Sold inventory costing $22,200 for $14,800 cash.
- Purchased inventory on account, $43,250.
- Paid off all short-term notes due, $128,500.
- Purchased equipment for cash, $67,800.
- Sold marketable securities costing $18,300 for cash,$15,250.
- Collected cash on accounts receivable, $70,100.
Required:
1. Compute the following amounts and ratios as of the beginningof the year:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
2. Indicate the effect of each of the transactions given aboveon 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 andindicate their effects as compared to the ratios and amounts at thebeginning of the period.
Answer:
ANSWER:
Computation of the amounts and ratios as of the beginning of theyear
1)
a) Working Capital
Working capital = Current Assets – Current liability
= (61,000+28,300+328,400+436,600+6,200) -(183,800+82,000+51,900)
= 860,500-317,700
= $542,800
b) Current Ratio
Current ratio = Current Assets / Current liabilities
= (61,000+28,300+328,400+436,600+6,200) /(183,800+82,000+51,900)
= 860,500 / 317,700
= 2.7085
c) Acid test ratio:
Acid test ratio = (Total current Assets – Inventory – Prepaidexpenses) / Current liability
= (860,500 – 436,600- 6,200)/ 317,700
= 1.3148
2)
Effect of each of the given transactions on workingcapital, the current ratio, and the acid-test ratio
| Transaction | Working Capital | Current Ratio | Acid-Test Ratio | |
| x. | Paid a cash dividend previously declared | None | Increase | Increase |
| a. | Issued capital stock for cash | Increase | Increase | Increase |
| b. | Sold inventory at a gain | Increase | Increase | Increase |
| c. | Wrote off uncollectible accounts | Decrease | Decrease | Decrease |
| d. | Declared a cash dividend | Decrease | Decrease | Decrease |
| e. | Paid accounts payable | None | None | None |
| f. | Borrowed on a short-term note | None | None | None |
| g. | Sold inventory at a loss | Decrease | Decrease | Increase |
| h. | Purchased inventory on account | None | None | Decrease |
| i. | Paid short-term notes | None | None | None |
| j. | Purchased equipment for cash | Decrease | Decrease | Decrease |
| k. | Sold marketable securities at a loss | Decrease | Decrease | Decrease |
| l. | Collected accounts receivable | None | None | None |
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