Question

A company began the month with current assets $200k and $80k of current liabilities.

Required:

Review the following transactions. Indicate the effect they have on the corporation’s current ratio by placing an ‘X’ in the appropriate column. Treat each transaction independently.

		Increase	Decrease	No Effect
a.	Paid $10,000 of accounts payable with cash.
b.	Declared a $1 per share cash dividend on the 10,000 common shares that were outstanding.
c.	Paid a $10,000 dividend that was declared one month ago.
d.	Borrowed $10,000 cash from a bank as a 60-day, 10% loan.
e.	Borrowed $25,000 cash from a bank as a 10-year mortgage on the plant.
f.	Repurchased $10,000 of common shares for $10,000 cash.

Answer 1

Solution

		Increase	Decrease	No effect
a.	Paid $10,000 of accounts payable with cash.	X
b.	Declared a $1 per share cash dividend on the 10,000 common shares that were outstanding.		X
c.	Paid a $10,000 dividend that was declared one month ago.	X
d.	Borrowed $10,000 cash from a bank as a 60-day, 10% loan.		X
e.	Borrowed $25,000 cash from a bank as a 10-year mortgage on the plant.	X
f.	Repurchased $10,000 of common shares for $10,000 cash.		X

The payment of cash to accounts payable may have the same decrease in Current asset and current liability but the effect due to decrease in both ion current ratio will still be positive. The ratio will increase.

Similarly increase in current liability and increase in cash in transaction(d) Will have same effect on total current asset and current liability but the current ratio will decrease.