Question
Denna Companys working capital accounts at the beginning of the year follow: Cash $ 66,000 Marketable securities $ 26,800 Accounts receivable, net $ 340,400 Inventory
Denna Companys working capital accounts at the beginning of the year follow:
| Cash | $ | 66,000 |
| Marketable securities | $ | 26,800 |
| Accounts receivable, net | $ | 340,400 |
| Inventory | $ | 449,600 |
| Prepaid expenses | $ | 7,200 |
| Accounts payable | $ | 192,800 |
| Notes due within one year | $ | 92,000 |
| Accrued liabilities | $ | 56,400 |
During the year, Denna Company completed the following transactions:
- Paid a cash dividend previously declared, $26,000.
- Issued additional shares of common stock for cash, $192,000.
- Sold inventory costing $66,800 for $96,000, on account.
- Wrote off uncollectible accounts in the amount of $8,400, reducing the accounts receivable balance accordingly.
- Declared a cash dividend, $26,000.
- Paid accounts payable, $93,600.
- Borrowed cash on a short-term note with the bank, $54,000.
- Sold inventory costing $20,700 for $13,800 cash.
- Purchased inventory on account, $47,000.
- Paid off all short-term notes due, $146,000.
- Purchased equipment for cash, $71,800.
- Sold marketable securities costing $16,800 for cash, $14,000.
- Collected cash on accounts receivable, $75,600.
Required:
1. Compute the following amounts and ratios as of the beginning of the year:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
2. Indicate the effect of each of the transactions given above on working capital, the current ratio, and the acid-test ratio. Give the effect in terms of increase, decrease, or none. Item (x) is given as an example. Consider each transaction independently and indicate their effects as compared to the ratios and amounts at the beginning of the period.
| The Effect on | ||||
| Transaction | Working Capital | Current Ratio | Acid-Test Ratio | |
| x. | Paid a cash dividend previously declared | None | Increase | Increase |
| a. | Issued additional shares of common stock for cash | |||
| b. | Sold inventory at a gain | |||
| c. | Wrote off uncollectible accounts | |||
| d. | Declared a cash dividend | |||
| e. | Paid accounts payable | |||
| f. | Borrowed on a short-term note | |||
| g. | Sold inventory at a loss | |||
| h. | Purchased inventory on account | |||
| i. | Paid short-term notes | |||
| j. | Purchased equipment for cash | |||
| k. | Sold marketable securities at a loss | |||
| l. | Collected accounts receivable |
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
9781285586618
