Effects of transactions on various ratios

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Reference no: EM13956041

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

Reference no: EM13956041

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