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FIN 300 : chap 3

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School
Ryerson University
Department
Finance
Course
FIN 300
Professor
Scott Anderson

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Document Summary

Answers to concepts review and critical thinking questions. If inventory is purchased with cash, then there is no change in the current ratio. Thus, if debt is paid off with cash, the current ratio increases if it was initially greater than 1. 0. Inventory sold at cost reduces inventory and raises cash, so the current ratio is unchanged. Inventory sold for a profit raises cash in excess of the inventory recorded at cost, so the current increases. ratio. The firm has increased inventory relative to other current assets; therefore, assuming current liability levels remain unchanged, liquidity has potentially decreased. A current ratio of 0. 50 means that the firm has twice as much in current liabilities as it does in current assets; the firm potentially has poor liquidity. If pressed by its short-term creditors and suppliers for immediate payment, the firm might have a difficult time meeting its obligations.

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Related Questions

Assuming that the current ratio is currently 2, which of the following actions will increase it?

Purchasing inventory with cash.

Purchasing inventory on short-term credit.

Paying off a short-term bank loan with long-term debt.

None of the above increase the current ratio.

All of the above increase the current ratio.

Please, explain this task as accurate and detailed as possible.

Are these two statements true or false and why? Explain in details.

) If our current ratio is greater than 1,5, then borrowing on a short-term basis and using the funds to build up our cash would cause the current ratio to increase.

2) If our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

2. Christopher construction, Inc. has current assets of $20,000and current liabilities of $10,000. If we assume that eachtransaction is independent, what is the effect of each of thefollowing transaction on Christopher Construction Inc.’s currentratio? Compute the current ratio for each case. a) $2000 ofaccounts payable are paid off with cash. b) Inventories of $5000are purchased on credit. c) Additional common stock is sold for$4000 cash. d) A long-term debt of $2,000 is obtained, and theproceeds are used to buy a new machine. e) Account receivable of$1,000 are collected in cash. 2. Christopher construction, Inc. hascurrent assets of $20,000 and current liabilities of $10,000. If weassume that each transaction is independent, what is the effect ofeach of the following transaction on Christopher ConstructionInc.’s current ratio? Compute the current ratio for each case. a)$2000 of accounts payable are paid off with cash. b) Inventories of$5000 are purchased on credit. c) Additional common stock is soldfor $4000 cash. d) A long-term debt of $2,000 is obtained, and theproceeds are used to buy a new machine. e) Account receivable of$1,000 are collected in cash. 2. Christopher construction, Inc. hascurrent assets of $20,000 and current liabilities of $10,000. If weassume that each transaction is independent, what is the effect ofeach of the following transaction on Christopher ConstructionInc.’s current ratio? Compute the current ratio for each case. a)$2000 of accounts payable are paid off with cash. b) Inventories of$5000 are purchased on credit. c) Additional common stock is soldfor $4000 cash. d) A long-term debt of $2,000 is obtained, and theproceeds are used to buy a new machine. e) Account receivable of$1,000 are collected in cash.