Current Ratio. What effect would the following actions have on a firm’s current ratio? Assume that net working capital is positive. a. Inventory is purchased. b. A supplier is paid. c. A short-term bank loan is repaid. d. A long-term debt is paid off early. e. A customer pays off a credit account. f. Inventory is sold at cost. g. Inventory is sold for a profit.

Question

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Answer 1

Textbook Question

Chapter 3, Problem 1CTCR

Current Ratio. What effect would the following actions have on a firm’s current ratio? Assume that net working capital is positive.

a. Inventory is purchased.

b. A supplier is paid.

c. A short-term bank loan is repaid.

d. A long-term debt is paid off early.

e. A customer pays off a credit account.

f. Inventory is sold at cost.

g. Inventory is sold for a profit.

a)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Purchase of inventory:

The current ratio has no change if the inventory is purchased with cash. If the purchase of inventory is on credit, then the current ratio decreases if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

b)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Payment made to a supplier:

The current ratio increases by decreasing the accounts that have to be paid by cash if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

c)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Repayment of the short-term bank loan:

Decreasing short-term debt with cash tends to increase the current ratio, if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

d)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Early payment of the long-term debt:

As long-term debt matures, the remaining interest expenses and the principal amount that has to be repaid become current liabilities. Thus, the current ratio increases if the debt is paid off by cash and the current ratio at that time must be initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

e)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

A customer is paying off a credit account:

The current ratio remains unchanged when there is a increase in receiving the cash and there is a reduction in the accounts receivables.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

f)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory at cost:

The selling of inventory at cost decreases the inventory and increases the cash, thus there is no change in the current ratio.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

g)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory for profit:

The current ratio increases when the inventory is sold for profit. This is because the selling of inventory for profit increases excess cash in the inventory that is recorded at cost.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

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Students have asked these similar questions

Which of the following statements are false? Select all that apply a. Liquidity ratios are used to measure the speed with which various accounts are converted into sales. b. When ratios of different years are being compared, inflation should be taken into consideration c. Return on total assets (ROA) is sometimes called return on investment d. Generally, inventory is concerned with the most liquid asset that a firm possesses. e. A P/E ratio of 20 indicates that investors are willing to pay $20 for each $1 of earnings.

A. What is the company’s gross profit margin?B. What is the company’s inventory turnover?C. What is the company’s current ratio?D. What is the company’s return on asset?E. What is the company’s net profit margin? F. What is the company’s days receivable?G. What is the company’s quick ratio?

Which of the following events will cause a company’s current ratio to decrease? a. The sale of inventory for credit (accounts receivable) b. Issuing stock for cash c. The sale of inventory for cash d. Paying off long-term debt with cash

Answer 2

Textbook Question

Chapter 3, Problem 1CTCR

Current Ratio. What effect would the following actions have on a firm’s current ratio? Assume that net working capital is positive.

a. Inventory is purchased.

b. A supplier is paid.

c. A short-term bank loan is repaid.

d. A long-term debt is paid off early.

e. A customer pays off a credit account.

f. Inventory is sold at cost.

g. Inventory is sold for a profit.

a)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Purchase of inventory:

The current ratio has no change if the inventory is purchased with cash. If the purchase of inventory is on credit, then the current ratio decreases if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

b)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Payment made to a supplier:

The current ratio increases by decreasing the accounts that have to be paid by cash if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

c)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Repayment of the short-term bank loan:

Decreasing short-term debt with cash tends to increase the current ratio, if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

d)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Early payment of the long-term debt:

As long-term debt matures, the remaining interest expenses and the principal amount that has to be repaid become current liabilities. Thus, the current ratio increases if the debt is paid off by cash and the current ratio at that time must be initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

e)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

A customer is paying off a credit account:

The current ratio remains unchanged when there is a increase in receiving the cash and there is a reduction in the accounts receivables.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

f)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory at cost:

The selling of inventory at cost decreases the inventory and increases the cash, thus there is no change in the current ratio.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

g)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory for profit:

The current ratio increases when the inventory is sold for profit. This is because the selling of inventory for profit increases excess cash in the inventory that is recorded at cost.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

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Answer 3

Textbook Question

Chapter 3, Problem 1CTCR

Current Ratio. What effect would the following actions have on a firm’s current ratio? Assume that net working capital is positive.

a. Inventory is purchased.

b. A supplier is paid.

c. A short-term bank loan is repaid.

d. A long-term debt is paid off early.

e. A customer pays off a credit account.

f. Inventory is sold at cost.

g. Inventory is sold for a profit.

a)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Purchase of inventory:

The current ratio has no change if the inventory is purchased with cash. If the purchase of inventory is on credit, then the current ratio decreases if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

b)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Payment made to a supplier:

The current ratio increases by decreasing the accounts that have to be paid by cash if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

c)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Repayment of the short-term bank loan:

Decreasing short-term debt with cash tends to increase the current ratio, if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

d)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Early payment of the long-term debt:

As long-term debt matures, the remaining interest expenses and the principal amount that has to be repaid become current liabilities. Thus, the current ratio increases if the debt is paid off by cash and the current ratio at that time must be initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

e)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

A customer is paying off a credit account:

The current ratio remains unchanged when there is a increase in receiving the cash and there is a reduction in the accounts receivables.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

f)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory at cost:

The selling of inventory at cost decreases the inventory and increases the cash, thus there is no change in the current ratio.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

g)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory for profit:

The current ratio increases when the inventory is sold for profit. This is because the selling of inventory for profit increases excess cash in the inventory that is recorded at cost.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

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Answer 4

Textbook Question

Chapter 3, Problem 1CTCR

Current Ratio. What effect would the following actions have on a firm’s current ratio? Assume that net working capital is positive.

a. Inventory is purchased.

b. A supplier is paid.

c. A short-term bank loan is repaid.

d. A long-term debt is paid off early.

e. A customer pays off a credit account.

f. Inventory is sold at cost.

g. Inventory is sold for a profit.

a)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Purchase of inventory:

The current ratio has no change if the inventory is purchased with cash. If the purchase of inventory is on credit, then the current ratio decreases if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

b)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Payment made to a supplier:

The current ratio increases by decreasing the accounts that have to be paid by cash if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

c)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Repayment of the short-term bank loan:

Decreasing short-term debt with cash tends to increase the current ratio, if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

d)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Early payment of the long-term debt:

As long-term debt matures, the remaining interest expenses and the principal amount that has to be repaid become current liabilities. Thus, the current ratio increases if the debt is paid off by cash and the current ratio at that time must be initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

e)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

A customer is paying off a credit account:

The current ratio remains unchanged when there is a increase in receiving the cash and there is a reduction in the accounts receivables.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

f)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory at cost:

The selling of inventory at cost decreases the inventory and increases the cash, thus there is no change in the current ratio.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

g)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory for profit:

The current ratio increases when the inventory is sold for profit. This is because the selling of inventory for profit increases excess cash in the inventory that is recorded at cost.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

a)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Purchase of inventory:

The current ratio has no change if the inventory is purchased with cash. If the purchase of inventory is on credit, then the current ratio decreases if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

b)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Payment made to a supplier:

The current ratio increases by decreasing the accounts that have to be paid by cash if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

c)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Repayment of the short-term bank loan:

Decreasing short-term debt with cash tends to increase the current ratio, if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

d)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Early payment of the long-term debt:

As long-term debt matures, the remaining interest expenses and the principal amount that has to be repaid become current liabilities. Thus, the current ratio increases if the debt is paid off by cash and the current ratio at that time must be initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

e)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

A customer is paying off a credit account:

The current ratio remains unchanged when there is a increase in receiving the cash and there is a reduction in the accounts receivables.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

f)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory at cost:

The selling of inventory at cost decreases the inventory and increases the cash, thus there is no change in the current ratio.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

g)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory for profit:

The current ratio increases when the inventory is sold for profit. This is because the selling of inventory for profit increases excess cash in the inventory that is recorded at cost.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 8

a)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Purchase of inventory:

The current ratio has no change if the inventory is purchased with cash. If the purchase of inventory is on credit, then the current ratio decreases if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Answer 13

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Purchase of inventory:

The current ratio has no change if the inventory is purchased with cash. If the purchase of inventory is on credit, then the current ratio decreases if it was initially greater than one.

Answer 14

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 15

b)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Payment made to a supplier:

The current ratio increases by decreasing the accounts that have to be paid by cash if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 16

b)

Expert Solution

Answer 17

b)

Expert Solution

Answer 18

Expert Solution

Answer 19

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Answer 20

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Payment made to a supplier:

The current ratio increases by decreasing the accounts that have to be paid by cash if it was initially greater than one.

Answer 21

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 22

c)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Repayment of the short-term bank loan:

Decreasing short-term debt with cash tends to increase the current ratio, if it was initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 23

c)

Expert Solution

Answer 24

c)

Expert Solution

Answer 25

Expert Solution

Answer 26

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Answer 27

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Repayment of the short-term bank loan:

Decreasing short-term debt with cash tends to increase the current ratio, if it was initially greater than one.

Answer 28

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 29

d)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Early payment of the long-term debt:

As long-term debt matures, the remaining interest expenses and the principal amount that has to be repaid become current liabilities. Thus, the current ratio increases if the debt is paid off by cash and the current ratio at that time must be initially greater than one.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 30

d)

Expert Solution

Answer 31

d)

Expert Solution

Answer 32

Expert Solution

Answer 33

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Answer 34

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Early payment of the long-term debt:

As long-term debt matures, the remaining interest expenses and the principal amount that has to be repaid become current liabilities. Thus, the current ratio increases if the debt is paid off by cash and the current ratio at that time must be initially greater than one.

Answer 35

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 36

e)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

A customer is paying off a credit account:

The current ratio remains unchanged when there is a increase in receiving the cash and there is a reduction in the accounts receivables.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 37

e)

Expert Solution

Answer 38

e)

Expert Solution

Answer 39

Expert Solution

Answer 40

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Answer 41

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

A customer is paying off a credit account:

The current ratio remains unchanged when there is a increase in receiving the cash and there is a reduction in the accounts receivables.

Answer 42

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 43

f)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory at cost:

The selling of inventory at cost decreases the inventory and increases the cash, thus there is no change in the current ratio.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 44

f)

Expert Solution

Answer 45

f)

Expert Solution

Answer 46

Expert Solution

Answer 47

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Answer 48

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory at cost:

The selling of inventory at cost decreases the inventory and increases the cash, thus there is no change in the current ratio.

Answer 49

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 50

g)

Expert Solution

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory for profit:

The current ratio increases when the inventory is sold for profit. This is because the selling of inventory for profit increases excess cash in the inventory that is recorded at cost.

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.

Answer 51

g)

Expert Solution

Answer 52

g)

Expert Solution

Answer 53

Expert Solution

Answer 54

Summary Introduction

To discuss: The effect of certain actions on a firm’s current ratios. The net working capital is assumed positive.

Introduction:

The process of analyzing and calculating financial ratios in order to evaluate the firm’s performance and to find actions that are necessary to improve the firm’s performance is ratio analysis

Answer 55

Explanation of Solution

The effects that certain actions have on the firm’s current ratio:

Selling of inventory for profit:

The current ratio increases when the inventory is sold for profit. This is because the selling of inventory for profit increases excess cash in the inventory that is recorded at cost.

Answer 56

Conclusion

The current ratio comes under the liquidity ratio. The liquidity ratio focuses on the ability of the firm to pay back short-term debt obligations. To measure this ability, the current ratio takes the current total assets and the current total liabilities of the company.