Question

Gwynn Incorporated had the following transactions involving current assets and current liabilities during February 2017.

Feb. 3 Collected accounts receivable of $15,000.
7 Purchased equipment for $23,000 cash.
11 Paid $3,000 for a 1-year insurance policy.
14 Paid accounts payable of $12,000.
18 Declared cash dividends, $4,000.
Additional information: As of February 1, 2017, current assets were $120,000 and current liabilities were $40,000.
Compute the current ratio as of the beginning of the month and after each transaction. (Round all answers to 2 decimal places, e.g. 1.83 :
Current ratio as of February 1, 2014 :1
Feb. 3 :1
Feb. 7 :1
Feb. 11 :1
Feb. 14 :1
Feb. 18 :1

Answer 1

Gwynn Incorporated

Current Ratio After Each Transaction:

Feb. 1, 2017: Current Ratio = 3:1

Feb. 3, 2017: Current Ratio = 3:1

Feb. 7, 2017: Current Ratio = 2.43:1

Feb. 11, 2017: Current Ratio = 2.35:1

Feb. 14, 2017: Current Ratio = 2.93:1

Feb. 18, 2017: Current Ratio = 2.56

Step-by-step explanation:

a) Data and Calculations:

February 1, 2017:

Current Assets = $120,000

Current Liabilities = $40,000

February 1, 2017: Current Ratio = $120,000/$40,000 = 3:1

Transactions:

Feb. 3 Collected accounts receivable of $15,000.

Current Assets = $120,000 (+$15,000 - $15,000)

Current Liabilities = $40,000

Current ratio = $120,000/$40,000 = 3:1

7 Purchased equipment for $23,000 cash.

Current Assets =$97,000 ($120,000 - $23,000)

Current Liabilities = $40,000

Current ratio = $97,000/$40,000 = 2.43:1

11 Paid $3,000 for a 1-year insurance policy.

Current Assets =$94,000 ($97,000 - $3,000)

Current Liabilities = $40,000

Current ratio = $94,000/$40,000 = 2.35:1

14 Paid accounts payable of $12,000.

Current Assets =$82,000 ($94,000 - $12,000)

Current Liabilities = $28,000 ($40,000 - $12,000)

Current ratio = $82,000/$28,000 = 2.93:1

18 Declared cash dividends, $4,000.

Current Assets =$82,000

Current Liabilities = $32,000 ($28,000 + $4,000)

Current ratio = $82,000/$32,000 = 2.56

b) The current ratio is one of the working capital ratios that show the relationship between current assets and current liabilities. It is computed as Current Assets divided by Current Liabilities.