1(A)
Compute
1(A)
Explanation of Solution
Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.
Compute working capital.
Working capital is the difference between current assets and current liabilities.
Formula:
Thus, working capital is $900,000.
1(b)
Compute
1(b)
Explanation of Solution
Compute current ratio.
Current Ratio: Current ratio is used to determine the relationship between current assets and current liabilities. Current ratio is determined by dividing current assets and current liabilities.
Formula:
The ideal current ratio is 2:1.
Current assets and current liabilities are determined as follows:
Thus, current ratio is 2.2.
1(c)
Calculate acid-test ratio.
1(c)
Explanation of Solution
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:
Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors.
Compute quick ratio.
First, determine the quick assets as shown below:
Then, determine acid-test ratio by dividing quick assets and current liabilities. Accounts payable are the only current liabilities.
Thus, quick ratio is 1.2.
2.
Compute working capital, Current ratio, and Quick ratio considering the given transactions.
2.
Explanation of Solution
2(a)
Sale of marketable securities at no gain or loss, $70,000.
When sale of marketable securities is considered, it increases the cash and decreases the marketable securities by same amount. So, there is no effect in the working capital, current ratio, and quick ratios that are calculated in the requirement 1. Thus, working capital, current ratio, and quick ratio are determined as follows:
Ratios | Working capital | Current ratio | Quick ratio |
$900,000 | 2.2 | 1.2 |
2(b)
Payment of accounts payable at $125,000.
Payment of accounts payable involves cash and accounts payable accounts. It decreases the accounts payable and cash. Cash is a current asset and accounts payable is a current liability. Both are the decreased by $125,000.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
2(c)
Purchase of goods on account $110,000.
Purchase of goods on account involves Merchandise inventory and accounts payable account. Merchandise inventory is a current asset and it is increased due to purchases made. Accounts payable is increased due to purchases made on account. So, both are increased by $110,000.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
2(d)
Payment of notes payable $100,000.
Notes payable involves notes payable and cash. Notes payable is a current liability and is decreased. Cash is a current asset and decreased due to payment made. So, reduce notes payable and cash by $100,000.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
2(e)
Cash dividend of $150,000 was declared.
Cash dividends involve cash dividends and dividends payable. Cash dividends are a stockholders’ equity. Dividend payable is a current liability and is increased.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
2(f)
Declaration of common stock dividend on common stock, $50,000.
Common stock dividend declaration involves common stock dividends and dividends payable. Common stock dividends are a stockholders’ equity. Dividend payable is a current liability and is increased.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
2(g)
Borrowal of cash from bank on a long-term note for $225,000.
Borrowal of cash from bank on a long-term note involves cash and long-term notes payable. Cash is a current asset and is increased due to borrowable of cash. Note is a long-term note and long-term liability is increased. So, only current assets and working capital is affected.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
2(h)
Received cash on account, $125,000.
Receipt of cash on account is $125,000. Cash and accounts receivable are assets. Cash is an asset and increases due to receipt of cash. Accounts receivable is an asset and is decreased. So, there is no effect of this transaction.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
2(i)
Issue of additional shares of stock for cash, $600,000.
Issue of additional shares of stock for cash involves Cash and common stock. Cash is an asset and increases due to issue of additional shares. Common stock is a stock and is increases. So, this affects common stock.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
2(j)
Payment of cash for prepaid expenses, $10,000.
Payment of cash for prepaid expenses involves prepaid expenses and cash. Prepaid expenses are asset. Prepaid expenses decrease and cash decreases. Thus, there is no effect.
Determine the new current assets, quick assets, and current liabilities as below:
Thus, ratios are determined as follows:
Compute working capital.
Compute current ratio.
Compute quick ratio.
The calculated ratios are as follows:
Transaction | Working capital | Current ratio | Quick ratio |
a. | $900,000 | 2.2 | 1.2 |
b. | $900,000 | 2.4 | 1.2 |
c. | $900,000 | 2.0 | 1.0 |
d. | $900,000 | 2.4 | 1.2 |
e. | $750,000 | 1.8 | 1.0 |
f. | $900,000 | 2.2 | 1.2 |
g. | $1,125,000 | 2.5 | 1.5 |
h. | $900,000 | 2.2 | 1.2 |
i. | 1,500,000 | 3.0 | 2.0 |
j. | $900,000 | 2.2 | 1.2 |
Want to see more full solutions like this?
Chapter 16 Solutions
Managerial Accounting
- Effect of transactions on current position analysis Data pertaining to the current position of Forte Company follow: 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: 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.arrow_forwardThe following items are reported on a companys balance sheet: Determine (a) the current ratio and (b) the quick ratio. Round to one decimal place.arrow_forwardIn performing vertical analysis, we express each item in a financial statement as a percentage of a base amount. What base amount is commonly used for income statement accounts? For balance sheet accounts?arrow_forward
- Identify how each of the following separate transactions through 10 affects financial statements. For increases, place a "+" and the dollar amount in the column or columns. For decreases, place a "-" and the dollar amount in the column or columns. Some cells may contain both an increase (+) and a decrease (-) along with dollar amounts. The first transaction is completed as an example. Required a. For the balance sheet, identify how each transaction affects total assets, total liabilities, and total cq- A1 P1 uity. For the income statement, identify how each transaction affects net income. b. For the statement of cash flows, identify how each transaction affects cash flows from operating ac- tivities, cash flows from investing activities, and cash flows from financing activities. 2 3 4 5 6 7 8 9 10 Transaction Owner invests $800 cash in business in exchange for stock Purchases $100 of supplies on credit Buys equipment for $400 cash Provides services for $900 cash Pays $400 cash for rent…arrow_forwardUsing the following Balance Sheet summary information, calculate for the two companies presented: A. working capital B. current ratioarrow_forwardANALY SIS OF PROFITABILITY Based on the financial statement data in Exercise 24-1A, compute the following profitability measures for 20-2 (round all calculations to two decimal places): (a) Profit margin ratio (b) Return on assets (c) Return on common stockholders equity (d) Earnings per share of common stockarrow_forward
- Below are the two basic financial statements of Chiz Trading Company. You are tasked to prepare an analysis using Horizontal and Vertical Analysis of their two-dated financial statements. In addition to this you have been tasked to prepare financial ratios measuring the company’s: Liquidity Status Current Ratios Quick Asset Ratios Efficiency Status Asset Turnover Fixed Asset Turnover Inventory Turnover Days in Inventory Accounts Receivable Turnover Days in Receivable Profitability Status: Gross Profit margin Ratio Operating Income Ratio Net Profit Ratio Return on Assets Return on Equityarrow_forwardUse the following information from XYZ Company's balance sheet to answer the next six questions: Assets a. b. c. d. a. b. 30. C. d. Cash........ Marketable Securities Accounts Receivable Inventory........ Property and Equipment. Accumulated Depreciation. Total Assets a. b. c. d. Liabilities and Stockholders' Equity Accounts Payable. Notes Payable (current). Mortgage Payable (long-term). Bonds Payable (long-term). Common Stock, $50 Par.. The average number of common stock shares outstanding during the year was 840 shares. Net earnings for the year were $6,300. 25. XYZ's current ratio is 6.0 to 1. 5.5 to 1. 26. XYZ's quick (acid-test) ratio is 4.0 to 1. 4.5 to 1. 3.5 to 1. 3.0 to 1. Paid-in Capital in Excess of Par......... Retained Earnings............ Total Liabilities, and Stockholders' Equity 4.0 to 1. 4.5 to 1. ***** 27. XYZ's earnings per share is $7.50 per share. $7.00 per share. $0.13 per share. $6,300 per share. 28. XYZ's return on assets is a. 6.9% b. 7.9% C. 14.6% d. 23.4% 29.…arrow_forwardcompute the following ratios using the Balance Sheet (Current Year) and Income Statement provided in the images below Current Ratio (in numeric format, 2 decimal places): Debt to Equity (in numeric format, 2 decimal places(): Return on Equity (stated as a percentage, 2 decimal places): Return on Assets (stated as a percentage, 2 decimal places):arrow_forward
- Determine the following: (a) debt ratio, (b) ratio of fixed assets to long-term liabilities, (c) ratio of liabilities to stockholders' equity, (d) asset turnover, (e) return on total assets, (f) return on stockholders' equity, and (g) return on common stockholders' equity. Round to two decimal places. a. Debt ratio b. Ratio of fixed assets to long-term liabilities C. Ratio of liabilities to stockholders' equity d. Asset turnover e. Return on total assets f. Return on stockholders' equity g. Return on common stockholders' equity 23.08✔ % 1.4 ✓ 0.3 ✔ 2.97 X % % %arrow_forwardIdentify how each of the following separate transactions 1 through 10 affects financial statements. For increases, place a “+” and the dollar amount in the column or columns. For decreases, place a “−” and the dollar amount in the column or columns. Some cells may contain both an increase (+) and a decrease (−) along with dollar amounts. The first transaction is completed as an example.arrow_forwardIdentify how each of the following separate transactions 1 through 10 affects financial statements. For increases, place a “+” and the dollar amount in the column or columns. For decreases, place a “−” and the dollar amount in the column or columns. Some cells may contain both an increase (+) and a decrease (−) along with dollar amounts. The first transaction is completed as an example.arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningCentury 21 Accounting Multicolumn JournalAccountingISBN:9781337679503Author:GilbertsonPublisher:Cengage