Three commonly used measures of liquidity are working capital, current ratio, and acid test ratio. For each
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Question:
Three commonly used measures of liquidity are working capital, current ratio, and acid test ratio.
For each of the following transactions, determine whether the measure will increase, decrease, or not change.
Assume that both ratios are greater than 1 and that working capital is positive.
- 1. The company purchased $100,000 of inventory on account.
- 2. The ending accounts receivable balance of $400,000 includes a large credit balance of $85,000 for a customer. The accountant will report the credit balance as a current liability.
- 3. Depreciation expense is recorded as an adjusting entry.
- 4. Dividends of $90,000 that were previously declared are now paid in cash to shareholders.
- 5. The merchandise, which cost $90,000, was sold on account for $100,000. The company uses the perpetual inventory system.
- 6. A customer makes a partial payment of $35,000 of the amount due on his accounts receivable.
Related Book For
Financial Accounting
ISBN: 978-1259103285
5th Canadian edition
Authors: Robert Libby, Patricia Libby, Daniel Short, George Kanaan, M
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