7.5 The XYZ Corporation has current liabilities of $130,000 with a current ratio of 2.5:1. Explain whether the individual transactions specified next increase or decrease the current ratio or the amount of working capital and by how much in each case. Treat each item separately. 1. Purchase is made of $10,000 worth of merchandise on account. 2. The company collects $5,000 in accounts receivable. 3. Repayment is planned of note payable, which is due in current period, with $15,000 cash from bank account. 4. The acquisition of a machine priced at $40,000 is paid for with $10,000 cash, and the lump-sum balance is due in 18 months. 5. The company conducts a sale of machinery for $10,000. Accumulated depreciation is $50,000, and its original cost is $80,000. 6. The company pays dividends of $10,000 in cash and $10,000 in stock. 7. Wages are paid to the extent of $15,000. Of this amount, $3,000 had been exhibited on the balance sheet as accrued (due). 8. The company borrows $30,000 for one year. Proceeds are used to increase the bank account by $10,000 to pay off accounts due to the supplier ($15,000) and to acquire the right to patents ($5,000). 9. The company writes down inventories by $7,000 and organization expenses by $5,000. 10. The company sells $25,000 worth (cost) of merchandise from stock to customers who pay in 30 days. Company has a gross margin of 40 percent.

Table 7.A4 Income Statement of Superior Technologies Year 2002 Year 2001 (Thousands of dollars) (Thousands of dollars) Net sales 193,213 91,954 Cost of goods and services 128,434 60,776 Gross profit 64,779 31,178 Selling, general, and administrative expenses 26,369 13,844 Employee profit sharing and retirement 9,831 4,167 Total overhead 36,200 18,011 Operating profit before interest and tax 28,579 13,167 Other income 956 273 EBIT 29,535 13,440 Interest paid 680 505 Taxable income 28,855 12,935 Income tax 14,712 6,934 Net income 14,143 6,001