Q1DC Lance Berkman is the controller ... [FREE SOLUTION]

Chapter 15: Q1DC (page 857)

Lance Berkman is the controller of Saturn, a dance club whose year-end is December 31. Berkman prepares checks for suppliers in December, makes the proper journal entries, and posts them to the appropriate accounts in that month. However, he holds on to the checks and mails them to the suppliers in January.
Requirements
1. What financial ratio(s) is(are) most affected by the action to hold onto the checks until January?
2. What is Berkman鈥檚 purpose in undertaking this activity?

Short Answer

Expert verified

Financial ratio affected are current ratio, quick ratio and cash ratio.
Purpose of Berkman鈥檚 this activity is to show that liquidity of firm is good.

Step by step solution

Financial ratio get affected:

Financial ratios like current ratio, quick ratio, and cash ratio get affected because, in calculating all these ratios, accounts payable and cash are involved as the value of these changes鈥� ratio gets impacted.

Berkmans Purpose

Berkman鈥檚 purpose is to show that firm has good short-term liquidity by lowering the book value of the liability and keeping assets unaffected. Berkman's activity of posting checks amount to respective account brings down the liability value, but payment is not made cash remain unaffected, which improve the liquidity ratio.

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Cash	\(19,000
Accounts Receivable, Net	82,000
Merchandise Inventory	183,000
Total Assets	638,000
Accounts Payable	102,000
Accrued Liabilities	35,000
Short-term Notes Payable	50,000
Long-term Liabilities	221,000
Net Income	69,000
Common Shares Outstanding	50,000 shares

GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017
Net sales revenue	\(461,000	\)424,000
Cost of goods sold	241,000	211,000
Gross profit	220,000	213,000
Operating expenses	137,000	135,000
Income from operations	83,000	78,000
Interest expenses	9,000	13,000
Income before taxes	74,000	65,000
Income tax expenses	18,000	24,000
Net income	\(56,000	\)41,000

GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017	2016
Assets
Current assets
Cash	\(99,000	\)98,000
Accounts receivables, Net	108,000	114,000	107,000
Merchandise inventory	146,000	164,000	202,000
Prepaid expenses	20,000	9,000
Total current assets	373,000	385,000
Property, plant, and equipment	211,000	181,000
Total assets	\(584,000	\)566,000	\(602,000

Liabilities
Total current liabilities	\)227,000	\(246,000
Long-term liabilities	117,000	100,000
Total liabilities	344,000	346,000

Stockholder鈥檚 equity
Preferred stock, 3%	98,000	98,000
Common stockholder equity, no par	142,000	122,000	89,000
Total liabilities and stockholder鈥檚 equity	\)584,000	\(566,000

	2019	2018	2017	2016
Net Sales Revenue	\(766000	\)708000	\(644000	\)664000
Net Income	60000	38000	36000	44000
Ending Common Stockholder鈥檚 Equity	368000	352000	326000	296000

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Short Answer

Step by step solution

Financial ratio get affected:

Berkmans Purpose

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