Question
Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio The following account balances are taken from the records of Redon Corp.: Cash $69,000
Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio
The following account balances are taken from the records of Redon Corp.:
| Cash | $69,000 |
| Short-term investments | 60,000 |
| Accounts receivable | 73,000 |
| 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 | 210,000 |
Required:
1. Use the information provided to compute the amount of working capital and Redon's current and quick ratios (round to three decimal points). Use the minus sign to indicate a negative working capital.
| Working capital | $ | |
| Current ratio | to 1 | |
| Quick ratio | to 1 |
2. Determine the effect that each of the following transactions will have on Redon'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. Consider each transaction independently; that is, assume that it is the only transaction that takes place.
Use the minus sign to indicate a negative working capital for amounts in column one. For the ratios, round to three decimal places and enter amounts as positive numbers. If an amount is zero, enter "0"
| Transaction | Working Capital | Effect on Working Capital | Current Ratio | Effect on Current Ratio | Quick Ratio | Effect on Quick Ratio |
| a. Purchased inventory on account, $15,000 | $ | - Select your answer -decreaseincreasenoneItem 5 | to 1 | - Select your answer -decreaseincreasenoneItem 7 | to 1 | - Select your answer -decreaseincreasenoneItem 9 |
| b. Purchased inventory for cash, $15,000 | $ | - Select your answer -decreaseincreasenoneItem 11 | to 1 | - Select your answer -decreaseincreasenoneItem 13 | to 1 | - Select your answer -decreaseincreasenoneItem 15 |
| c. Paid suppliers on account, $30,000 | $ | - Select your answer -decreaseincreasenoneItem 17 | to 1 | - Select your answer -decreaseincreasenoneItem 19 | to 1 | - Select your answer -decreaseincreasenoneItem 21 |
| d. Received cash on account, $40,000 | $ | - Select your answer -decreaseincreasenoneItem 23 | to 1 | - Select your answer -decreaseincreasenoneItem 25 | to 1 | - Select your answer -decreaseincreasenoneItem 27 |
| e. Paid insurance for next year, $20,000 | $ | - Select your answer -decreaseincreasenoneItem 29 | to 1 | - Select your answer -decreaseincreasenoneItem 31 | to 1 | - Select your answer -decreaseincreasenoneItem 33 |
| f. Made sales on account, $65,000 | $ | - Select your answer -decreaseincreasenoneItem 35 | to 1 | - Select your answer -decreaseincreasenoneItem 37 | to 1 | - Select your answer -decreaseincreasenoneItem 39 |
| g. Repaid short-term loans at bank, $25,000 | $ | - Select your answer -decreaseincreasenoneItem 41 | to 1 | - Select your answer -decreaseincreasenoneItem 43 | to 1 | - Select your answer -decreaseincreasenoneItem 45 |
| h. Borrowed $40,000 at bank for 90 days | $ | - Select your answer -decreaseincreasenoneItem 47 | to 1 | - Select your answer -decreaseincreasenoneItem 49 | to 1 | - Select your answer -decreaseincreasenoneItem 51 |
| i. Declared and paid $45,000 cash dividend | $ | - Select your answer -decreaseincreasenoneItem 53 | to 1 | - Select your answer -decreaseincreasenoneItem 55 | to 1 | - Select your answer -decreaseincreasenoneItem 57 |
| j. Purchased $20,000 of short-term investments | $ | - Select your answer -decreaseincreasenoneItem 59 | to 1 | - Select your answer -decreaseincreasenoneItem 61 | to 1 | - Select your answer -decreaseincreasenoneItem 63 |
| k. Paid $30,000 in salaries | $ | - Select your answer -decreaseincreasenoneItem 65 | to 1 | - Select your answer -decreaseincreasenoneItem 67 | to 1 | - Select your answer -decreaseincreasenoneItem 69 |
| l. Accrued additional $15,000 in taxes | $ | - Select your answer -decreaseincreasenoneItem 71 | to 1 | - Select your answer -decreaseincreasenoneItem 73 | to 1 | - Select your answer -decreaseincreasenone |
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Investment Risk Management
Authors: Yen Yee Chong
1st Edition
0470849517, 9780470849514
