The effect of each transactions on these ratios
Current Assets:
Cash $100,000
Marketable Securities 50,000
Accounts Receivable $250,000
Less Allowance for Doubtful Accounts (20,000) 230,000
Inventory, LIFO 300,000
Prepaid 8,000
Total Current Assets $688,000
Current Liabilities:
Accounts Payable $200,000
Notes Payable 50,000
Taxes Payable 10,000
Accrued Liabilities 30,000
Total Current Liabilities $290,000
a. Compute the following as of December 31, 2006:
1. working capital
2. current ratio
3. acid-test ratio (conservative)
4. cash ratio
(These ratios are to be computed using only the December 31, 2006 data.)
During 2007, DeCort Company completed the following transactions:
a. Purchased fixed assets for cash, $20,000.
b. Exchanged DeCort Company common stock for land. Estimated value of transaction,
$80,000.
c. Payment of $40,000 on short-term notes payable.
d. Sold marketable securities costing $20,000 for $25,000 cash.
e. Sold DeCort Companny common stock for $70,000.
f. Wrote off an account receivable in the amount of $20,000.
g. Declared a cash dividend in the amount of $5,000.
h. Paid the above cash dividend.
I. Sold inventory costing $10,000 for $15,000 cash.
j. Sold inventory costing $5,000 for $8,000 on account.
k. Paid accounts payable in the amount of $20,000.
l. Sold marketable securities costing $20,000 for $20,000 cash.
m. Issued a credit memo on an account receivable, $1,000.
For 2007, indicate the effect of each of the transactions given on working capital, current ratio, acid-test ratio, and cash ratio. Give the effect in terms of +, -, or none. Consider each transaction to be the first transaction of the year. Assume at the start of the year that the current ratio is over 2 to 1, the acid-test ratio is over 1 to 1, and the cash ratio is less than 1 to 1.
