Question

You’re the CFO of X Co. X has long-term debt. A covenant in the debt agreement stipulates that X must maintain a current ratio [current assets / current liabilities] that is at least 2.0.

As a balance sheet date approaches, you obtain an interim partial balance sheet that shows the following

You're the CFO of X Co. X has long-term debt. A covenant in the debt agreement stipulates that X must maintain a current ratio (current assets/ current liabilities] that is at least 2.0. As a balance sheet date approaches, you obtain an interim partial balance sheet that shows the following CURRENT ASSETS CASH $ 5,000,000 A/R 2,000,000 INVENTORY 3,000,000 TOTAL C/A $ 10,000,000 CURRENT LIABILITIES A/P $ 4,000,000 OTHER 2,000,000 $ 6,000,000 CURRENT RATIO: 1.67 1 Based on the above, describe what action you could take to raise the current ratio to 2.0. (That action can be described in single sentence]

Please answer these three questions. Thank you.

Answer 1

1) Pay off the Accounts Payable (current liabilities) $200,000.

2)

Transaction	General Journal	Debit($)	Credit($)
1	Accounts Payable	200,000
	Cash		200,000
	(to record the payment to accounts payable)

3) Current Assets Current Liabilities

Cash $300,000 A/P $200,000

A/R $200,000 Other $200,000

Inventory $300,000   

TOTAL $800,000 $400,000

Current Ratio = Current assets / Current liabilities

= $800,000 / $400,000

= 2.0