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.

  1. Issued additional shares of common stock for cash,$182,000.
  2. Sold inventory costing $62,800 for $91,000, on account.
  3. Wrote off uncollectible accounts in the amount of $6,400,reducing the accounts receivable balance accordingly.
  4. Declared a cash dividend, $21,000.
  5. Paid accounts payable, $85,600.
  6. Borrowed cash on a short-term note with the bank, $46,500.
  7. Sold inventory costing $22,200 for $14,800 cash.
  8. Purchased inventory on account, $43,250.
  9. Paid off all short-term notes due, $128,500.
  10. Purchased equipment for cash, $67,800.
  11. Sold marketable securities costing $18,300 for cash,$15,250.
  12. Collected cash on accounts receivable, $70,100.


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.



Computation of the amounts and ratios as of the beginning of theyear


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


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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