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

Question

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

The following account balances are taken from the records of The Cabianca Company:

Required:

1. Use the information provided to compute the amount of working capital and Cabianca 's current and quick ratios (round to three decimal points).

2. Determine the effect that each of the following transactions will have on Cabianca '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.

Cash $69,000 Short-term investments 58,000 Accounts receivable 74,000 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

Explanation / Answer

Part 1 :

Part 2 :

Current Assets = Cash + Short-term investments + Accounts Receivable + Inventory + Prepaid Insurance $311,000 Current Liabilities = Accounts Payable + Taxes Payable + Salaries and Wages payable + Short-term loans payable $200,000 Working Capital = CA - CL $111,000 Current Ratio = CA/CL 1.555 to 1 Transaction Working Capital Effect on Current Ratio Effect on Quick Ratio Effect on Explanation Working Capital Current Ratio Quick Ratio a. Purchased inventory on account, $15,000 $111,000 No Effect 1.516 Decrease 0.865 Decrease Inventory increases, Accounts Payable Increases b. Purchased inventory for cash, $14,000 $111,000 No Effect 1.555 No Effect 1.485 Increase Cash Decreases, Inventory Increases c. Paid suppliers on account, $30,000 $111,000 No Effect 1.653 Increase 1.006 Increase Cash Decreases, Accounts Payable Decreases d. Received cash on account, $40,000 $111,000 No Effect 1.555 No Effect 1.005 No Effect Cash Increases, Accounts Receivable Decreases e. Paid insurance for next year, $20,000 $111,000 No Effect 1.555 No Effect 0.805 Decrease Cash Decreases, Prepaid Insurance Increases f. Made sales on account, $47,000 $111,000 No Effect 1.555 No Effect 1.475 Increase Accounts Receivable Increases, Inventory Decreases g. Repaid short-term loans at bank, $25,000 $111,000 No Effect 1.634 Increase 1.006 Increase Cash Decreases, Short Term Loans Payable Decrease h. Borrowed $40,000 at bank for 90 days $111,000 No Effect 1.463 Decrease 1.004 Decrease Cash Increases, Short Term Loans Payble Increases i. Declared and paid $45,000 cash dividend $66,000 Decreases 1.330 Decrease 0.780 Decrease Cash Decreases j. Purchased $20,000 of short-term investments $111,000 No Effect 1.555 No Effect 1.005 No Effect Cash Decreases, Short Term Investments Increases k. Paid $30,000 in salaries $111,000 No Effect 1.653 Increase 1.006 Increase Cash Decreases, Salaries and Wages Payble Decreases l. Accrued additional $15,000 in taxes $96,000 Decreases 1.447 Decrease 0.935 Decrease Taxes Payble Increase Quick Ratio = (CA - Inventory - Prepaid Insurance)/CL 1.005 to 1

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