Question

Denna Company’s working capital accounts at the beginning of the year follow:

Cash $ 50,000
Marketable securities $ 30,000
Accounts receivable, net $ 200,000
Inventory $ 210,000
Prepaid expenses $ 10,000
Accounts payable $ 150,000
Notes due within one year $ 30,000
Accrued liabilities $ 20,000
During the year, Denna Company completed the following transactions:
a. Paid a cash dividend previously declared, $12,000.
b. Issued additional shares of common stock for cash, $100,000.
c. Sold inventory costing $50,000 for $80,000, on account.
d. Wrote off uncollectible accounts in the amount of $10,000, reducing the accounts receivable balance accordingly.
e. Declared a cash dividend, $15,000.
f. Paid accounts payable, $50,000.
g. Borrowed cash on a short-term note with the bank, $35,000.
h. Sold inventory costing $15,000 for $10,000 cash.
i. Purchased inventory on account, $60,000.
j. Paid off all short-term notes due, $30,000.
k. Purchased equipment for cash, $15,000.
l. Sold marketable securities costing $18,000 for cash, $15,000.
m. Collected cash on accounts receivable, $80,000.
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.

Answer 1

1. Compute the following amounts and ratios as of the beginning of the year:

a. Working capital = current assets - current liabilities

working capital = ($50,000 + $30,000 + $200,000 + $210,000 + $10,000) - ($150,000 + $30,000 + $20,000) = $500,000 - $200,000 = $300,000

b. Current ratio = current assets / current liabilities

current ratio = $500,000 / $200,000 = 2.5

c. Acid-test ratio = (current assets - inventory) / current liabilities

acid test ratio = ($500,000 - $210,000) / $200,000 = $290,000 / $200,000 = 1.45