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Impact on current and quick ratio

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

a. What are the currentand the quick ratios for Jamesway?

b. If Jamesway takes \$.25 million in cash and pays off \$.25 million of current liabilities, what happens to its current and quick ratios? What happens to its real liquidity?

c. If Jamesway sells \$.5 million of its accounts receivable to a bank and uses the proceeds to pay off short-term debt obligations, what happens to its current and quick ratios?

d. If Jamesway sells \$1.0 million in new stock and places the proceeds in marketable securities, what happens to its current and quick ratios?

e. What do these examples illustrate about the current and quick ratios?

Solution Preview

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

a. What are the currentand the quick ratios for Jamesway?

Current Ratio = Current Assets / Current Liabilities = 3.0/1.5=2.0
Quick Ratio = (Cash + Receivables + ...

Solution Summary

The solution explains the impact on current and quick ratio of the given transactions.

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