BUS 320 Study Guide - Final Guide: Current Liability, Accounts Payable, Asset Turnover

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Suppose the firm has in current assets and in current liabilities for a current ratio of 2. If we use in cash to reduce current liabilities, then the new current ratio is (4-1)/ (2-1) =3. If we reverse this to in current assets and in current liabilities, then the current ratio becomes (2-1)/ (4-1) =1/3. The second case, the current ratio would usually rise because inventory is normally shown at cost and the sales would normally be at something greater than cost. The increase in either cash or receivables is therefore greater than the decrease in inventory. This increases current assets and the current ratio rises. Here is a variation on the receivables collection period. Account payable= cost of goods sold/ account payable= 1344/344= 3. 9 times. So payables turned over about every 365/344= 94 days. On average then, this company takes 94 days to pay.

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