Problem 15-14 Effects of Transactions on Various Ratios [LO15-2]

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

Cash	$	56,000
Marketable securities	$	29,800
Accounts receivable, net	$	316,400
Inventory	$	423,600
Prepaid expenses	$	5,200
Accounts payable	$	174,800
Notes due within one year	$	72,000
Accrued liabilities	$	47,400

During the year, Denna Company completed the following transactions:

1. Paid a cash dividend previously declared, $16,000.
2. Issued additional shares of common stock for cash, $172,000.
3. Sold inventory costing $58,800 for $86,000, on account.
4. Wrote off uncollectible accounts in the amount of $4,400, reducing the accounts receivable balance accordingly.
5. Declared a cash dividend, $16,000.
6. Paid accounts payable, $77,600.
7. Borrowed cash on a short-term note with the bank, $39,000.
8. Sold inventory costing $23,700 for $15,800 cash.
9. Purchased inventory on account, $39,500.
10. Paid off all short-term notes due, $111,000.
11. Purchased equipment for cash, $63,800.
12. Sold marketable securities costing $19,800 for cash, $16,500.
13. Collected cash on accounts receivable, $64,600.

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.