Problem 14-14 (Static) Effects of Transactions on Various Ratios [LO14-2]

Denna Companys working capital accounts at the beginning of the year follow:

Cash	$ 50,000
Marketable securities	$ 30,000
Accounts receivable, net	$ 200,000
Inventory	$ 210,000
Prepaid expenses	$ 10,000
Accounts payable	$ 150,000
Notes due within one year	$ 30,000
Accrued liabilities	$ 20,000

During the year, Denna Company completed the following transactions:

1. Paid a cash dividend previously declared, $12,000.
2. Issued additional shares of common stock for cash, $100,000.
3. Sold inventory costing $50,000 for $80,000, on account.
4. Wrote off uncollectible accounts in the amount of $10,000, reducing the accounts receivable balance accordingly.
5. Declared a cash dividend, $15,000.
6. Paid accounts payable, $50,000.
7. Borrowed cash on a short-term note with the bank, $35,000.
8. Sold inventory costing $15,000 for $10,000 cash.
9. Purchased inventory on account, $60,000.
10. Paid off all short-term notes due, $30,000.
11. Purchased equipment for cash, $15,000.
12. Sold marketable securities costing $18,000 for cash, $15,000.
13. Collected cash on accounts receivable, $80,000.

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.

Compute the following amounts and ratios as of the beginning of the year: (Round your ratios to 2 decimal places.)

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.

Transaction	The Effect on Working Capital	The Effect on Current Ratio	The Effect on 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