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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Effect of transactions on current position analysis

Data pertaining to the current position of Forte Company follow:

Cash $412,500
Marketable securities 187,500
Accounts and notes receivable (net) 300,000
Inventories 700,000
Prepaid expenses 50,000
Accounts payable 200,000
Notes payable (short-term) 250,000
Accrued expenses 300,000

Instructions

1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round ratios in parts b through j to one decimal place.

2. List the following captions on a sheet of paper:

images

Compute the working capital, the current ratio, and the quick ratio after each of the following transactions and record the results in the appropriate columns. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place.

a. Sold marketable securities at no gain or loss, $70,000.

b. Paid accounts payable, $125,000.

c. Purchased goods on account, $110,000.

d. Paid notes payable, $100,000.

e. Declared a cash dividend, $ 150,000.

f. Declared a common stock dividend on common stock, $50,000.

g. Borrowed cash from bank on a long-term note, $225,000.

h. Received cash on account. $ 125,000.

i. Issued additional shares of stock for cash, $600,000.

j. Paid cash for prepaid expenses, $ 10,000.

1) (a)

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

To compute: Working capital

Given info: Total current assets and current liabilities.

Explanation

Working capital is the difference between current assets and current liabilities. 

Formula:

Current ratio<

b)

To determine

To compute: Current ratio

Given info: Total current assets and current liabilities.

c)

To determine

Acid-Test Ratio: This ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio:

Acid Ratio=Quick assetsCurrentliabilities

Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors.

To calculate: Acid-test ratio

Given info: Current assets and current liabilities

2.

To determine

To compute: Working capital, Current ratio, and Quick ratio considering the given transactions.

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