Paying short-term debts: Effects on working capital, the current ratio, and the statement of cash flows

ISS Inc. began operations on January 1, 2012. It engaged in the following economic events during 2012:

  1. Issued 6,000 shares of no-par common stock for $10 per share.
  2. Purchased on account 20,000 units of inventory for $1 per unit.
  3. Paid and capitalized $7,000 for rent covering 2012 and 2013.
  4. Purchased furniture for $30,000, paying $20,000 in cash and signing a long-term note for the remaining balance.
  5. Sold on account 8,800 units of inventory for $4 per unit.
  6. Paid one-half of the outstanding accounts payable.
  7. Received $12,000 from customers on open accounts.
  8. Paid miscellaneous expenses of $10,000 for the year.
  9. Depreciation recorded on the furniture totaled $5,000.
  10. Accrued interest on the long-term note payable amounted to $1,000.
  11. Declared dividends of $3,000 at year-end to be paid in January 2013.
  12. Recorded entry for $3,000 of rent expired during 2012.


a. Prepare journal entries for these events.

b. Prepare an income statement, statement of shareholders” equity, balance sheet, and statement of cash flows (indirect method).

c. Compute working capital and the current ratio.

d. Assume that the company pays the outstanding accounts payable on the final day of 2012. Recompute working capital, the current ratio, and cash provided (used) by operating activities.