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    A Discussion On A Firm's Current Ratio

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    How would the following actions affect a firm's current ratio? (a) Inventory is purchased and paid for with cash, it is not purchased on account. (b) The firm takes out a short-term bank loan to pay its overdue accounts payable. (c) A customer prepays in full for specially ordered merchandise that will take 60 days to manufacture. (d) Inventory is sold at the firm's normal 35% markup over cost.

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    Solution Preview

    How would the following actions affect a firm's current ratio? (a) Inventory is purchased and paid for with cash, it is not purchased on account. (b) The firm takes out a short-term bank loan to pay its overdue accounts payable. (c) A customer prepays in full for specially ordered merchandise that will take 60 days to manufacture. (d) Inventory is sold at the firm's normal 35% markup over cost.

    Current Ratio = Current Assets / Current Liabilities

    Current Assets = Cash + Inventory + Receivables
    Current Liabilities= Accounts Payables + Short term loans + Deferred revenue (Advance payments from customers)

    (a) Inventory is purchased and paid for with cash, it is ...

    Solution Summary

    The solution discusses how the current ratio would be affected by purchase of inventory, firm taking out a short term loan, prepayment, sale of inventory

    $2.19