Question

5.9.- Determine the effect on the current ratio, the quick ratio, net working capital (current assets less current liabilities), and the debt ratio (total liabilities to total assets) of each of the following transactions. Consider each transaction separately and assume that prior to each transaction the current ratio 2X, the quick ratio is 1X, and the debt ratio is 50%. The company uses an allowance for doubtful accounts. Use I for increase, D for decrease, and N for no change.

a. borrows $10,000 from bank on a short-term note

b. Writes off a $5,000 customer account

c. Issues $25,000 in new common stock for cash

d. purchases for cash $7,000 of new equipment

e. Inventory of $5,000 is destroyed by fire

f. Invests $3,000 in short-term marketable securities

g. Issues $10,000 long term bonds

h. Sells equipment with book value of $6,000 for $7,000

i. Issues $10,000 stock in exchange for land

j. Purchases $3,000 inventory for cash

k. Purchases $5,000 inventory on credit

l. Pays $2,000 to supplier to reduce account payable

Answer 1

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