PROBLEM 14-12

PROBLEM 14-12. Effects of Transactions on Financial Ratios [LO 3] Cummings operates an equipment rental company and sells related supplies. The company's current assets and current liabilities at the beginning of the year are listed in the table below: Cash Marketable securities Accounts receivable, net Inventory $145,000 85,000 268,000 137,000 Prepaid expenses Accounts payable Notes payable, current Accrued expenses $ 34,000 217,000 68,000 46,000 During the year, Cummings completed the following transactions: 1. Paid a cash dividend previously declared of $18,000. 2. Issued additional shares of common stock for cash, $150,000. 3. Sold inventory costing $80,000 for $115,000, on account. 4. Declared a cash dividend of $19,000. 5. Paid accounts payable of $85,000. 6. Borrowed cash on a short-term note with the bank, $57,000. 7. Purchased inventory on account for $91,000. 8. Paid off all short-term notes due, $68,000. 9. Purchased equipment for cash, $23,000. 10. Sold marketable securities costing $29,000 for $25,000. 11. Collected cash on accounts receivable, $137,000. 12. Paid interest on a note payable, $3,500.
b. Indicate the effect of each transaction listed above on the current ratio and the acid-test ratio (quick ratio). Give the effect in terms of increase, decrease, or none. Part a is done as an example below to show the format used. Current Ratio increase Effect on Acid-Test Ratio (Quick Ratio) increase Paid a cash dividend previously declared