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Cash $240 Accounts receivable (net of allowance of $80) 400 Inventory 300 Other current assets 160 Accounts payable 218 Other current liabilities 340 The president of the company is concerned that the company is in violation of a debt covenant that requires the company to maintain a minimum current ratio of 2.0. He believes the best way to rectify this is to reverse a bad debt write-off in the amount of $20 that the company just recorded. He argues that the write-off was done too. early and that the collections department should be given more time to collect the outstanding receivables. The CFO argues that this will have no effect on the current ratio, so a better idea is to use $20 of cash to pay accounts payable early. Florence Company uses the allowance method to account for bad debts. a. Calculate the current ratio under the following scenarios: Round answers to two decimal places. Current ratio (with no action) Current ratio (after reversal of bad debt) Current ratio (after paydown of accounts payable) Which action, if any, should Florence Company take to maintain a minimum 2.0 current ratio? 0 0 0

Cash $240 Accounts receivable (net of allowance of $80) 400 Inventory 300 Other current assets 160 Accounts payable 218 Other current liabilities 340 The president of the company is concerned that the company is in violation of a debt covenant that requires the company to maintain a minimum current ratio of 2.0. He believes the best way to rectify this is to reverse a bad debt write-off in the amount of $20 that the company just recorded. He argues that the write-off was done too. early and that the collections department should be given more time to collect the outstanding receivables. The CFO argues that this will have no effect on the current ratio, so a better idea is to use $20 of cash to pay accounts payable early. Florence Company uses the allowance method to account for bad debts. a. Calculate the current ratio under the following scenarios: Round answers to two decimal places. Current ratio (with no action) Current ratio (after reversal of bad debt) Current ratio (after paydown of accounts payable) Which action, if any, should Florence Company take to maintain a minimum 2.0 current ratio? 0 0 0

Financial Accounting: The Impact on Decision Makers
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter7: Receivables And Investments
Section: Chapter Questions
Problem 7.1DC: Reading 3M Companys Balance Sheet: Accounts Receivable The following current asset appears on the...
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b. Will either the quick ratio or the times-interest-earned ratios be affected by at least one of these ideas? Quick ratio Times-interest-earned ratio
Transcribed Image Text:b. Will either the quick ratio or the times-interest-earned ratios be affected by at least one of these ideas? Quick ratio Times-interest-earned ratio
Cash $240 Accounts receivable (net of allowance of $80) 400 Inventory 300 Other current assets. 160 Accounts payable 218 Other current liabilities 340 The president of the company is concerned that the company is in violation of a debt covenant that requires the company to maintain a minimum current ratio of 2.0. He believes the best way to rectify this is to reverse a bad debt write-off in the amount of $20 that the company just recorded. He argues that the write-off was done too early and that the collections department should be given more time to collect the outstanding receivables. The CFO argues that this will have no effect on the current ratio, so a better idea is to use $20 of cash to pay accounts payable early. Florence Company uses the allowance method to account for bad debts. a. Calculate the current ratio under the following scenarios: Round answers to two decimal places. Current ratio (with no action) Current ratio (after reversal of bad debt) Current ratio (after paydown of accounts payable) Which action, if any, should Florence Company take to maintain a minimum 2.0 current ratio? 0 0 0 +
Transcribed Image Text:Cash $240 Accounts receivable (net of allowance of $80) 400 Inventory 300 Other current assets. 160 Accounts payable 218 Other current liabilities 340 The president of the company is concerned that the company is in violation of a debt covenant that requires the company to maintain a minimum current ratio of 2.0. He believes the best way to rectify this is to reverse a bad debt write-off in the amount of $20 that the company just recorded. He argues that the write-off was done too early and that the collections department should be given more time to collect the outstanding receivables. The CFO argues that this will have no effect on the current ratio, so a better idea is to use $20 of cash to pay accounts payable early. Florence Company uses the allowance method to account for bad debts. a. Calculate the current ratio under the following scenarios: Round answers to two decimal places. Current ratio (with no action) Current ratio (after reversal of bad debt) Current ratio (after paydown of accounts payable) Which action, if any, should Florence Company take to maintain a minimum 2.0 current ratio? 0 0 0 +
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