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BUS 320 (16)
Final

# example

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School
Simon Fraser University
Department
Course
BUS 320
Professor
Amir Azaran
Semester
Summer

Description
Example3 3.1 Suppose a firm were to pay off some of its suppliers and short-term creditors. what happens if a firm sells some merchandise? The first case is a trick question. Suppose the firm has \$4 in current assets and \$2 in current liabilities for a current ratio of 2. If we use \$1 in cash to reduce current liabilities, then the new current ratio is (4-1)/ (2-1) =3. If we reverse this to \$2 in current assets and \$4 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 inve
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