8 Required information The following information applies to the questions displa

Question

8 Required information The following information applies to the questions displayed below Edward Allen Interiors Inc. is a leading manufacturer and retaler of home furnishings in the United States and abroad. The following is adapted from Edward Allen's September 30, 2016, trial balance (The amounts shown represent millions of Part 7 of 8 points 5 128 17 114 29 318 150 179 Accounts Payable Accounts Receivable ash Pnnt Common Stock Equipment Notes Payable (long-term) Notos Payable (short-term) Prepaid Rent Ratained Earnings Salaries and Wages Payable 31 337 27 70 Assume that the following events occurred in the following quarter a. Paid $50 cash for additional inventory b. Issued additional shares of common stock for $40 in cash. c Purchased equipment for $160 paid $75 in cash and signed a note to pay the remaining $85 in two years. d Signed a short-ferm note to borrow $14 cash e Conducted negotiations to purchase a sawmill, which is expected to cost $36. Pre 8 9 of9: Next >

Explanation / Answer

Basic calculation before answering the questions

Question - 7 (a)

Current ratio = current assets / current liabilities = 291 / 170 = 1.71

Question - 7(b) ........... Decrease

Before these transaction, current ratio = 312 / 156 = 2 times. But we see it decreasing to 1.71. With relatively lower current assets the ability to pay for current liabilities shall be decreasing.

        Current Assets       Current Liabilities Accounts receivables 17 Accounts payable 128 Cash 114 Notes payable 1 Inventory 150 Salaries payable 27 Prepaid Rent 31 Total Current assets 312 Total current assets 156 Impact of the selected transactions (a) Decreases cash but increases Inventory 0 0 (b) Increases cash and also equity 40 0 (c) Cash decreases -75 0 (d) Cash increases and current liabilities also 14 14 (e) Negotiations are not economic events 0 0 291 170

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