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

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 two decimal points).

Working capital	$
Current ratio		to 1
Quick ratio		to 1

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. Consider each transaction independently; that is, assume that it is the only transaction that takes place.

Enter all amounts as positive numbers. For the ratios, round to three decimal places.

Transaction	Working Capital	Effect on Working Capital	Current Ratio	Effect on Current Ratio	Quick Ratio	Effect on Quick Ratio
a. Purchased inventory on account, $20,000	$	none	to 1		to 1
b. Purchased inventory for cash, $15,000	$	none	to 1		to 1
c. Paid suppliers on account, $30,000	$	none	to 1		to 1
d. Received cash on account, $40,000	$	none	to 1		to 1
e. Paid insurance for next year, $20,000	$	none	to 1		to 1
f. Made sales on account, $60,000	$	increase	to 1		to 1
g. Repaid short-term loans at bank, $25,000	$	none	to 1		to 1
h. Borrowed $40,000 at bank for 90 days	$	none	to 1		to 1
i. Declared and paid $45,000 cash dividend	$	decrease	to 1		to 1
j. Purchased $20,000 of short-term investments	$	none	to 1		to 1
k. Paid $30,000 in salaries	$	decrease	to 1		to 1
l. Accrued additional $15,000 in taxes	$	decrease	to 1		to 1

Feedback

Working capital and the current ratio both involve current assets and current liabilities. A transaction that causes an equal change in current assets and current liabilities will have no impact on working capital.