Question

In: Accounting

Jay Oullette, CEO of Bumper to Bumper Inc., anticipates that his company's year-end balance sheet will...

Jay Oullette, CEO of Bumper to Bumper Inc., anticipates that his company's year-end balance sheet will show current assets of $12,774 and current liabilities of $7,480. Oullette has asked your advice concerning a possible early payment of $3,770 of accounts payable before year-end, even though payment isn't due until later.

Required:

  1. Calculate the firm’s working capital and current ratio under each situation.
  2. Assume that Bumper to Bumper had negotiated a short-term bank loan of $6,000 that can be drawn down either before or after the end of the year. Calculate working capital and the current ratio at year-end under each situation, assuming that early payment of accounts payable is not made

Solutions

Expert Solution

Stuation 1) Current Ratio 1.7
Working Capital 5294
Current ratio = Current Assets/Current Liabilities
    =12774/7480
1.7
Working Capital = Current Assets - Current Liabilities
    =12774 -7480
                      5,294
Stuation 2) When 3770 paid to accounts payable in cash
Current Ratio 2.4
Working Capital 5294
Current ratio = Current Assets/Current Liabilities
    =(12774-3770) /(7480-3770)
2.4
Working Capital = Current Assets - Current Liabilities
    =(12774-3770) -(7480-3770)
                      5,294
Stuation 3) Current Ratio 1.4
Working Capital 5294
Current ratio = Current Assets/Current Liabilities
    =(12774+6000)/(7480+6000)
1.4
Working Capital = Current Assets - Current Liabilities
    =(12774+6000) - (7480+6000)
                      5,294

ekkarill92 answered 3 years ago
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