Science Co. manufactures industrial products and employs a calendar year for financial reporting purposes. Items (a) through (e) present several of Science Co. transactions during 2007. The total of cash equivalents, marketable securities, and net receivables exceeded total current liabilities both before and after each transaction described. Science Co. had positive profits in 2007 and a credit balance throughout 2007 in its retained earnings account.
Answer the following multiple-choice questions:
a. Payment of a trade account payable of $64,500 would
1. Increase the current ratio, but the acid-test ratio would not be affected.
2. Increase the acid-test ratio, but the current ratio would not be affected.
3. Increase both the current and acid-test ratios.
4. Decrease both the current and acid-test ratios.
5. Have no effect on the current and acid-test ratios.
b. The purchase of raw materials for $85,000 on open account would
1. Increase the current ratio.
2. Decrease the current ratio.
3. Increase net working capital.
4. Decrease net working capital.
5. Increase both the current ratio and net working capital.
c. The collection of a current accounts receivable of $29,000 would
1. Increase the current ratio.
2. Decrease the current ratio.
3. Increase the acid-test ratio.
4. Decrease the acid-test ratio.
5. Not affect the current or acid-test ratios.
d. Obsolete inventory of $125,000 was written off during 2007. This would
1. Decrease the acid-test ratio.
2. Increase the acid-test ratio.
3. Increase net working capital.
4. Decrease the current ratio.
5. Decrease both the current and acid-test ratios.
e. The early liquidation of a long-term note with cash would
1. Affect the current ratio to a greater degree than the acid-test ratio.
2. Affect the acid-test ratio to a greater degree than the current ratio.
3. Affect the current and acid-test ratios to the same degree.
4. Affect the current ratio, but not the acid-test ratio.
5. Affect the acid-test ratio, but not the current ratio.