Effects of Transactions on Various Ratios
Selected amounts from Gullins Limited's balance sheet from the beginning of the year are shown below:
|
Account
|
Amount
|
|
Cash
|
$ 35,000
|
|
Marketable securities
|
6,000
|
|
Accounts receivable, net
|
85,000
|
|
Inventory
|
250,000
|
|
Prepaid expenses
|
4,000
|
|
Plant and equipment, net
|
475,000
|
|
Accounts payable
|
100,000
|
|
Accrued liabilities
|
40,000
|
|
Notes due within one year
|
60,000
|
|
Bonds payable in five years
|
80,000
|
During the year, the company completed the following transactions (the first item, lettered "x," is used below as an example in the requirements):
x. Sold inventory for cash: $25,000.
a. Declared a cash dividend: $20,000.
b. Purchased inventory on account: $50,000.
c. Sold inventory on account: $40,000.
d. Purchased equipment by issuing a short-term note payable due within one year: $100,000.
e. Paid a cash dividend previously declared: $15,000.
f. Paid accounts payables totalling $30,000.
g. Purchased inventory for cash: $60,000.
h. Wrote off uncollectible accounts in the amount of $5,000, reducing the accounts receivable balance accordingly.
i. Purchased temporary investments for cash: $10,000.
j. Repurchased common shares from several shareholders for cash: $50,000.
k. Paid short-term notes due: $60,000.
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.
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 of the format to use:
|
|
The Effect on
|
|
|
Transaction
|
WorkingCapital
|
CurrentRatio
|
Acid-TestRatio
|
|
(x) Sold inventory for cash
|
None
|
None
|
Increase
|