![Financial Accounting](https://www.bartleby.com/isbn_cover_images/9781337272124/9781337272124_largeCoverImage.gif)
Effect of transactions on current position analysis
Data pertaining to the current position of Forte Company follow:
Instructions
1. Compute (a) the
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.
1) (a)
![Check Mark](/static/check-mark.png)
Compute working capital.
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.
Description:
Working capital is the difference between current assets and current liabilities.
Formula:
Thus, working capital is $900,000.
b)
![Check Mark](/static/check-mark.png)
Compute Current ratio.
Explanation of Solution
Compute current ratio.
Description:
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.
c)
![Check Mark](/static/check-mark.png)
Calculate Acid-test ratio.
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.
Description:
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.
![Check Mark](/static/check-mark.png)
Compute Working capital, Current ratio, and Quick ratio considering the given transactions.
Explanation of Solution
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 |
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.
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.
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.
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.
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.
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.
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.
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.
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 17 Solutions
Financial Accounting
- The 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_forwardWhat is the Days Payables Outstanding? Use the attached financial data to calculate the ratios. Round to the nearest decimal. Abercrombie & Fitch Co (ANF) Financial Data Revenues Cost of Sales Total Operating Expenses Interest Expense Income Tax Expense Diluted Weighted Shares Outstanding Cash + Equivalents Accounts Receivable Inventories Total Current Assets Total Assets Accounts Payable Total Current Liabilities Total Stockholders' Equity ANF Stock Price = $10.30 Select one O A. 42.3 days, 37.0 days OB. 76.1 days, 89.4 days OC. 89.4 days, 37.0 days OD. 76.1 days, 97.7 days 2022 $3,659.3 $1,545.9 $2,026.9 $28.5 $37.8 52.8 $257.3 $108.5 $742.0 $1,220.4 $2,694.0 $322.1 $935.5 $656.1 2021 $3,712.8 $1,400.8 $1,968.9 $34.1 $38.9 62.6 $823.1 $69.1 $525.9 $1,507.8 $2,939.5 $374.8 $1,015.2 $826.1arrow_forwardBelow 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_forward
- a)Please calculate the all ratios of companies - Profitability ratios(Profit margin, Return on assets ,Return on equity) Asset utilization ratios (Receivables turnover, Average collection period, Inventory turnover, Fixed asset turnover, Total asset turnover) Liquidity ratios (Current ratio, Quick ratio) & Debt utilization ratios (Debt total assets, Times interest earned, Fixed charge coverage) b) Calculate all your ratios in and Excel File. You need to show all your calculations in excel file but use the calculated value in your main report. [Note:The answer should be based on "Canadian national railway annual report 2016 and 2017"]arrow_forwarda)Please calculate all the ratios of companies - Profitability ratios(Profit margin, Return on assets , Return on equity) , Asset utilization ratios (Receivables turnover, Average collection period, Inventory turnover, Fixed asset turnover, Total asset turnover) Liquidity ratios (Current ratio, Quick ratio) & Debt utilization ratios (Debt total assets, Times interest earned, Fixed charge coverage) b) Calculate all your ratios in and Excel File. You need to show all your calculations in excel file but use the calculated value in your main report. c) Discuss each of the ratios for two years and explain their implications for the company. Analyze the ratios that you have calculated d) Use graphs, charts in your analysis.arrow_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
- Using the following Balance Sheet summary information, calculate for the two companies presented: A. working capital B. current ratioarrow_forwardInstructions Using the financial statements and additional information, compute the following ratios for the El Camino Company for 2021. Show all computations. Computations 1. Current ratio 2. Return on common stockholders' equity 3. Price-earnings ratio 4. Inventory turnover 5. Accounts receivable turnover 6. Times interest earned 7. Profit margin 8. Days in inventory 9. Payout ratio 10. Return on assetsarrow_forwardThe following schedule of assets and liabilities relates to Kona Enterprises. Their year-end is 28 February. Income received in advance Input VAT Output VAT Prepaid expenses Accumulated depreciation: Equipment Equipment Fixed deposit (maturing on 31 May 2023) Savings account Bank overdraft Accrued expenses Accrued income Trade receivables Trading inventory Land and Buildings Mortgage loan: Vida Bank Trade payables 2022 2 000 3 000 6 500 7500 30 000 90 000 40 000 13 500 0 16 000 9 500 34 000 105 000 950 000 450 000 150 000 2023 Calculate the level of working capital (total current assets) as at the financial years ended 28 February 2022 and 28 February 2023. Calculate the total for current liabilities as at the financial year ending 28 February 2022 and 2023. 1000 3 500 11 500 5 000 35 000 100 000 40 000 18 500 4 500 10 500 12 000 41 500 115 000 950 000 380 000 170 000arrow_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_forwardPlease Complete the Following: 1. Complete a vertical and horizontal analysis on the tabs labeled "Balance Sheet" and "Income Statement", use total assets on the balance sheet and net sales on the income statement for your vertical analysis. 2. Using the balance sheet and income statement, complete the ratios on the tab labeled "Ratios" 3. Answer the final OBSERVATION QUESTION (listed under Ratios calculations) Consolidated Balance Sheets (USD $) 12/31/2020 Vertical Analysis 12/31/2019 Vertical Analysis Horizontal Analysis In Millions, unless otherwise specified Current Assets: Cash and Cash Equivalents $1,723 $1,929 Receivables, net 1,484 1,398 Merchandise Inventories 11,079 11,057 Other Current Assets 1,016 895 Total Current Assets 15,302 15,279 Property and Equipment, at…arrow_forwardRequired: (a) You are required to calculate the following ratios:(i) Gross profit margin(ii) Operating profit margin(iii) Expenses to sales(iv) Return on Capital Employed(v) Asset turnover(vi) Non-current asset turnover(vii) Current Ratio(viii) Quick Ratio(ix) Inventory days(x) Receivables days(xi) Payable days(xii) Interest cover (b) In light of your calculations comment on the performance of the company over thelast two years.arrow_forward
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCollege 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
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337272124/9781337272124_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337912020/9781337912020_smallCoverImage.jpg)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337794756/9781337794756_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781305654174/9781305654174_smallCoverImage.gif)