The Jamesway Printing Corporation has current assets of 3.0million.Of this total

Question

The Jamesway Printing Corporation has current assets of 3.0million.Of this total, 1.0 Million is Inventory, 0.5 million iscash, 1.0 million is accounts receivable, and the balance is marketable securities. Jamesway has 1.5 million in current liabilities.

a) what are the current and quick ratios for Jamesway?

b) If jamesway takes 0.25 million in cash and pays off 0.25million of current liabilities, what happens to its current andquick ratios? Waht happens to its real liquidity?

c)IF Jamesway sells 0.5 million of its accounts receivable toa factor(a type of specialized financial institution that buysaccounts receivable: and uses the proceedes to pay off short term debt obligations, what happens to its current and quickratio?

d) IF Jamesway sells 1.0 million in new stock and place theproceedes in marketable securities, what happens to its current andquick ratios?

e) What do these examples illustrate about the current andquick ratios?

Explanation / Answer

Amount (in Million) Current Assets $3.00 Quick Assets Current Assets $3.00 Less: Inventory $1.00 $2.00 Current Liabilities $1.50 a) Current Ratio = Current Asset/Current Liabilities 2 :1 Quick Ratio = Quick Asset/Current Liabilities 1.33 :1 b) Revised Current Assets $3.00 Revised Quick Assets $2.00 Revised Current Liabilities $1.25 Revised Current Ratio = Revised Current Asset/Revised Current Liabilities 2.4 :1 Quick Ratio = Revised Quick Asset/Revised Current Liabilities 1.6 :1 c) Revised Current Assets $2.50 Revised Quick Assets $1.50 Revised Current Liabilities $1.50 Revised Current Ratio = Revised Current Asset/Revised Current Liabilities 1.67 :1 Quick Ratio = Revised Quick Asset/Revised Current Liabilities 1 :1 d) Revised Current Assets $3.00 Revised Quick Assets $3.00 Revised Current Liabilities $1.50 Revised Current Ratio = Revised Current Asset/Revised Current Liabilities 2 :1 Quick Ratio = Revised Quick Asset/Revised Current Liabilities 2 :1 e) As current Assets increases and current Liabilities remain same then, the Current Ratio & Quick Ratio both increases As current Assets decreases and current Liabilities remain same then, the Current Ratio & Quick Ratio both falls

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