PROBLEM 2 a. Modern Medical Devices has a current ratio of 0.5. Which of the fol
ID: 2722766 • Letter: P
Question
PROBLEM 2 a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio? 0.5 1.2 - Use cash to pay off current liabilities. - Collect some of the current accounts receivable. - Use cash to pay off some long-term debt. - Purchase additional inventory on credit (i.e., accounts payable). - Sell some of the existing inventory at cost. b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio? PROBLEM 2 a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio? 0.5 1.2 - Use cash to pay off current liabilities. - Collect some of the current accounts receivable. - Use cash to pay off some long-term debt. - Purchase additional inventory on credit (i.e., accounts payable). - Sell some of the existing inventory at cost. b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio?Explanation / Answer
Answer (a) iv. Purchase additional inventory on credit (i.e., accounts payable)
At Current Ratio 0.50, Current Assets = 1/2 Current Liabilities.
That is assets are half of current liabilities. If we shall make immediate payment
Let us suppose Firm has current assets worth 50000 and Current liabilities worth 100000 (50000*2) , If we
purchase Inventory worth 20000 on credit, It will increase Current assets to 70000 and Current Liabilities to 120000. Now
Current ratio = 70000/120000 = 0.58
Hence current ratio increased from 0.50 to 0.58.
Answer (b) If current ratio is 1.20 , use cash to pay off current liabilities
Let us suppose Firm has current assets worth 120000 (100000*1.20) and Current liabilities worth 100000 , If we
Pay off 20000 current liabilities by using cash, It will decrease Current assets to 100000 and Current Liabilities to 80000. Now
Current ratio = 100000/80000 = 1.25
Hence current ratio increased from 1.20 to 1.25.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.