Question

(See the eText on p. 81). What effect would the following actions have on Philippe Corporation’s current ratio? Provide your reasoning. Hand-write your responses (no copying, please). a. Starting 2015 Current Ratio = _________________ b. $100 Inventory is purchased with cash. c. A supplier is paid $100 with cash. d. A short-term bank loan of $100 is repaid with cash. e. Long-term debt of $100 is paid off early. f. A customer pays off a credit account of $100. g. Inventory is sold for $100 at cost. h. Inventory is sold for $200 - a profit of $100.

Answer 1

Current ratio = current assets/ current liabilities

Take base case of current assets 1500 and current liabilities 1000

Current ratio = 1500/1000 = 1.5

Now analysis of given transactions:

Particulars	b.	c	d	e	f	g	h
Revised current assets	$            1,500	$    1,400	$                             1,400	$         1,400	$         1,500	$    1,500	$    1,600
Revised current liabilities	$            1,000	$       900	$                                900	$         1,000	$         1,000	$    1,000	$    1,000
New ratio	1.50	1.56	1.56	1.40	1.50	1.50	1.60
Old ratio	1.5	1.5	1.5	1.5	1.5	1.5	1.5
Effect on ratio	No change	Increase	Increase	Decrease	No change	No change	Increase

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