Balance Sheets (current assets shaded) 20001998 20011999 20022000 20031 20042 Cash & Equivalents $75 $75 $90 $100 $100 Accounts Receivable 300 400 600 550 500 Inventory 150 250 350 250 250 Net Fixed Assets 525 75 8610 8540 9800 Total Assets $1,0050 $1,3300 $1,6650 $1,4440 $1,3315 (current liabilities shaded) Accounts Payable $125 $175 $250 $225 $200 Notes Payable 165 162 178 136 99 Accrued Operating Exp. 60 161 165 89 76 Long-Term Debt 5500 4400 3300 1100 50 Shareholders Equity 200 402 757.2 890.2 890.2 Total Liabilities & NW $1,0050 $1,3300 $1,6650 $1,4440 $1,3315 Income Statements Revenues (Sales) $1,500 $2,250 $3,000 $2,000 $1,500 Cost of Goods Sold 600 900 1,200 800 600 Operating Expenses 600 797 895 750 725 Depreciation 35 50 65 70 75 Interest 30 33 28 25 10 Taxes 94 188 325 142 36 Net Profit 141 282 487.2 213 54 Dividends 40 80 132 80 54 Suppose a firm pays a $50,000 trade credit obligation to a supplier in cash. What impact does this transition have on the firm\'s current ratio if the initial current ratio equaled 1? What impact does this transition have on the firm\'s current ratio if the initial current ratio equaled 0.5? What impact does this transaction have on the firm\'s current ratio if the initial current ratio equaled 1.7?
Solution
a When payment to supplier is made in cash, current asset will also reduce and current liabilites will also reduce by same amount and there will be no effect on current ratio. b As both current asset and current liabilities reduce equally,so no impact. c As both current asset and current liabilities reduce equally,so no impact.
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1. Balance Sheets (current assets shaded) 20001998 20011999 20022000 20031 20042 Cash &
Equivalents $75 $75 $90 $100 $100 Accounts Receivable 300 400 600 550 500 Inventory 150
250 350 250 250 Net Fixed Assets 525 75 8610 8540 9800 Total Assets $1,0050 $1,3300
$1,6650 $1,4440 $1,3315 (current liabilities shaded) Accounts Payable $125 $175 $250 $225
$200 Notes Payable 165 162 178 136 99 Accrued Operating Exp. 60 161 165 89 76 Long-Term
Debt 5500 4400 3300 1100 50 Shareholders Equity 200 402 757.2 890.2 890.2 Total Liabilities
& NW $1,0050 $1,3300 $1,6650 $1,4440 $1,3315 Income Statements Revenues (Sales) $1,500
$2,250 $3,000 $2,000 $1,500 Cost of Goods Sold 600 900 1,200 800 600 Operating Expenses
600 797 895 750 725 Depreciation 35 50 65 70 75 Interest 30 33 28 25 10 Taxes 94 188 325 142
36 Net Profit 141 282 487.2 213 54 Dividends 40 80 132 80 54 Suppose a firm pays a $50,000
trade credit obligation to a supplier in cash. What impact does this transition have on the firm's
current ratio if the initial current ratio equaled 1? What impact does this transition have on the
firm's current ratio if the initial current ratio equaled 0.5? What impact does this transaction
have on the firm's current ratio if the initial current ratio equaled 1.7?
Solution
a When payment to supplier is made in cash, current asset will also reduce and current liabilites
will also reduce by same amount and there will be no effect on current ratio. b As both current
asset and current liabilities reduce equally,so no impact. c As both current asset and current
liabilities reduce equally,so no impact.
