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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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
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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.
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 ...
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