Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 48

Effect of transactions on liquidity measures Selected balance sheet accounts for Tibbetts Company on September 30, 2010, are as follows:

Cash	$ 32,000
Marketable securities	58,000
Accounts receivable, net	86,000
Inventory	90,000
Prepaid expenses	14,000
Total current assets	$280,000
Accounts payable	$ 98,000
Other accrued liabilities	22,000
Short-term debt	40,000
Total current liabilities	$160,000

Required:

a.Calculate the working capital, current ratio, and acid-test ratio for Tibbetts Company as of September 30, 2010.

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b. Summarized here are the transactions/events that took place during the fiscal year ended September 30, 2011. Indicate the effect of each item on Tibbetts Company’s working capital, current ratio, and acid-test ratio. Use + for increase, - for decrease, and (NE) for no effect. (Hint: It may be helpful to use the horizontal model or to record the journal entry(ies) for each item before considering the effects on liquidity measures.)

	Example	Working Capital	Current Ratio	Acid-Test Ratio
	Paid accounts payable, $195,000.	NE	+	+
1.	Credit sales for the year amounted to $240,000. The cost of goods sold was $156,000.
2.	Collected accounts receivable, $252,000.
3.	Purchased inventory on account, $168,000.
4.	Issued 250 shares of common stock for $36 per share.
5.	Wrote off $7,000 of uncollectible accounts using the allowance for bad debts.
6.	Declared and paid a cash dividend, $20,000.
7. 8.	Sold marketable securities costing $26,000 for $31,000 in cash. Recorded insurance expense for the year, $12,000. The premium for the policy was paid in June 2010.
9.	Borrowed cash on a short-term bank loan, $10,000.
10.	Repaid principal of $40,000 and interest of $3,000 on a long-term bank loan.

Step 1 of 5

Effects of transactions on liquidity measures

By extracting the information: