Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio

(Note: Consider completing Problem 13-2 after this problem to ensure that you obtain a clear understanding of the effect of various transactions on these measures of liquidity.)

The following account balances are taken from the records of Liquiform Inc.:

Cash $ 70,000 Short-term investments 60,000 Accounts receivable 80,000 Inventory 100,000 Prepaid insurance 10,000 Accounts payable 75,000 Taxes payable 25,000 Salaries and wages payable 40,000 Short-term loans payable 60,000 Required 1. Use the information provided to compute the amount of working capital and Liquiform’s current and quick ratios (round to three decimal points).

2. Determine the effect that each of the following transactions will have on Liquiform’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. (For the ratios, round to three decimal points.) Consider each transaction independently; that is, assume that it is the only transaction that takes place.

Effect of Transaction on Working Current Quick Transaction Capital Ratio Ratio

a. Purchased inventory on account, $20,000

b. Purchased inventory for cash, $15,000

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, $60,000 g. Repaid short-term loans at bank, $25,000 h. Borrowed $40,000 at bank for 90 days i. Declared and paid $45,000 cash dividend j. Purchased $20,000 of short-term investments k. Paid $30,000 in salaries l. Accrued additional $15,000 in taxes.

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