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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Effect of transactions on current position analysis
Data pertaining to the current position of Newlan Company are as follows:


Instructions

List the following captions on a sheet of paper:

.


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 above. Round to one decimal place.
a.Sold temporary investments for cash at no gain or loss, $50,000.
b. Paid accounts payable, $40,000.
c.Purchased goods on account, $75,000.
d. Paid notes payable, $30,000.
e. Declared a cash dividend, $15,000.
f.Declared a stock dividend on common stock, $24,000.
g. Borrowed cash from bank on a long-term note, $150,000.
h. Received cash on account, $72,000.
i.Issued additional shares of stock for cash, $300,000.
j.Paid cash for prepaid expenses. $10,000.

To determine

Introduction:

Financial Ratios:

Financial ratios are the metrics used to evaluate the liquidity efficiency and profitability and overall performance of the business.

To compute:

Working capital, Current ratio and Quick ratio.

Working capital is the portion of capital used to run day to day activities of the business.It is the difference between current assets and current liabilities. Itmeasures a company's liquidity, operational efficiency and short-term financial health.

The current ratio is a liquidity ratio which measures ability of a business to pay short term dues.It can be calculated as follows:

Current ratio=Current assets Current liabilities

The quick ratio measures short-term liquidity position of a business using its liquid assets.It can be calculated as follows:

Quick ratio=Current assetsInventory Current liabilities

To compute:

Effect of transactions on the current assets, current liabilities and current ratio and quick ratios.

Explanation
    TransactionsEffect of transaction working capitalcurrent ratio quick ratio
    opening balances current assets675,000
    current liabilities250,000
    425,000 2.7 1.94
    Sold temporary investments at no gain or loss, $50,000No effect as sale of investment decreased one current asset and increased cash balancecurrent assets675,000
    current liabilities250,000
    425,0002.71.94
    Paid accounts payable, $40,000Decrease in current liability and decrease in current assetscurrent assets635,000
    current liabilities210,000
    425,0003.02.1
    Purchased goods on account, $75,000Increase in inventory and increase in accounts payablecurrent assets750,000
    current liabilities325,000
    425,0002.31.7
    Paid notes payable, $30,000.Decrease in current liability and decrease in current assetscurrent assets645,000
    current liabilities220,000
    435,0002,932.0
    Declared a cash dividend, $15,000.Increase current liabilitycurrent assets675,000
    current liabilities265,000
    410,0002...

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