following data is from the payment on that date) current accounting records of F
ID: 2511982 • Letter: F
Question
following data is from the payment on that date) current accounting records of Florence Company Cash LO4 PIO-8A. Current Ratio, Quick Ratio, and Times-Interest-Earned Ratio The toll $120 200 150 80 110 170 . Other current liabilities . The president of the company is concerned that the company is in violation of a debt coven requires the company to maintain a minimum current ratio of 2.0. He believes this is to reverse a bad debt write-off in the amount of $10 that the company just recorded. He the best way to rectify the write-off was done too early, and that the collections department should be given more time to t the outstanding receivables. The CFO argues that this will have no effect on the current ratio, that so a better idea is to use $10 of cash to pay accounts payable early.Explanation / Answer
(a). Idea of The President and idea of CFO both have same result for attaining a minimum 2.0 current ratio. Let’s see both one by one;
President gave idea about to reverse bad debt write-off and we know that when written-off bad debts will be reversed then it will increase current assets and current liabilities will be remain same hence current ratio will improve.
Let’s understand it with the help of numerical calculation also;
Existing current assets are ($120 + $200 + $150 + $80) = $550
Existing current liabilities are ($110 + $170) = $280
Now as per idea of president, $10 written-off bad debts to be reversed hence as a result current assets will be increased by $10. Thus new current assets will be ($550 + $10) = $560
New current ratio = $560 / 280 = 2
Thus it proves that idea of president result into for attaining a minimum 2.0 current ratio.
Now let’s see impact of idea of CFO;
$10 of cash to be used to pay accounts payable, so let’s see impact of this on current ratio;
Existing current assets are ($120 + $200 + $150 + $80) = $550
Existing current liabilities are ($110 + $170) = $280
Now as per idea of CFO, $10 of cash to be used to pay accounts payable hence as a result current assets will be decreased by $10 and current liabilities also decreased by $10.
Thus new current assets will be ($550 - $10) = $540
New current liabilities will be ($280 - $10) = $270
New current ratio = $540 / 270 = 2
Thus it proves that idea of CFO also result into for attaining a minimum 2.0 current ratio.
(b).
Quick ratio will be affected by the idea of president that can be known as follow;
Existing quick assets ($120 + $200) = $320
Existing current liabilities are ($110 + $170) = $280
Thus existing quick ratio ($320 / $280) = 1.1428
Now if idea of President implemented then quick ratio will be as follow;
New quick assets ($120 + $200 + $10) = $330
New current liabilities are same ($110 + $170) = $280
Thus new quick ratio ($330 / $280) = 1.1786
Thus it proves that idea of President will improve quick ratio by a better margin that is 1.1786 from earlier 1.1428
Idea of CFO will also afffect quick ratio as follow;
Existing quick assets ($120 + $200) = $320
Existing current liabilities are ($110 + $170) = $280
Thus existing quick ratio ($320 / $280) = 1.1428
Now if idea of CFO implemented then quick ratio will be as follow;
New quick assets ($120 + $200 - $10) = $310
New current liabilities are ($110 + $170 - $10) = $270
Thus new quick ratio ($310 / $270) = 1.1481
Thus it proves that idea of CFO will improve quick ratio by a little margin that is 1.1481 from earlier 1.1428
So overall we can say that idea of president have much impact on quick ratio in compare to idea of CFO.
Times interest ratio will not affected by the idea of President because it have no impact on earnings before interest and interest expense, hence it will not affect Times interest ratio.
But idea of CFO will affect Times interest ratio because after paying accounts payables, it will result into low burden of interest expense, hence it will improve Times interest ratio.
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