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Effect of transactions on current position analysis

A company's ability to pay its current liabilities.

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Data pertaining to the current position of Forte Company are as follows:

The excess of the current assets of a business over its current liabilities.

A financial ratio that is computed by dividing current assets by current liabilities.

A financial ratio that measures the ability to pay current liabilities with quick assets (cash, marketable securities, accounts receivable).

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2. 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 of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place.

Working

Current

Quick

Transaction

Capital

Ratio

Ratio

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Cash $440,000 Marketable securities 175,000 Accounts and notes receivable (net) 335,000 Inventories 700,000 Prepaid expenses 44,000 Accounts payable 180,000 Notes payable (short-term) 230,000 Accrued expenses 290,000

Explanation / Answer

Solution

Current Assets - Current Liabilities
Current Assets = cash + marketable securities + Accounts receivable + invetories + prepaid expense

i.e $440000+$175000+$335000+$700000+$44000 = $1694000

and current liabilities = Account payables + notes payable + Accrued Expenses

i. e $180000+$230000+$290000 = $700000

so working capital = $1694000 - $700000 = $994000

Quick ratio = Quick Assets / Current Liabilities

Quick assets = cash + marketable securities + account receivables = $440000+$175000+$335000

= $950000

And current liabilites = $700000 ( as calculated for working capital)

so Quick ratio = $950000/$700000

=1.3571 times

Particulars Working Capital Current ratio Quick Ratio Answers or solution

Current Assets - Current Liabilities
Current Assets = cash + marketable securities + Accounts receivable + invetories + prepaid expense

i.e $440000+$175000+$335000+$700000+$44000 = $1694000

and current liabilities = Account payables + notes payable + Accrued Expenses

i. e $180000+$230000+$290000 = $700000

so working capital = $1694000 - $700000 = $994000

Current ration = Current Assets / Current Liabilities


i.e $1694000/$700000
= 2.42 times

Quick ratio = Quick Assets / Current Liabilities

Quick assets = cash + marketable securities + account receivables = $440000+$175000+$335000

= $950000

And current liabilites = $700000 ( as calculated for working capital)

so Quick ratio = $950000/$700000

=1.3571 times

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