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Chapter 5: 5 (page 237)

Perez Company reported an increase in inventories in the past year. Discuss the effect of this change on the current ratio (current assets 梅 current liabilities). What does this tell a statement user about Perez Company鈥檚 liquidity?

Short Answer

Expert verified

The current ratio and liquidity of the company will increase with the increase in inventory.

Step by step solution

01

Definition of Current Ratio

The financial metric reflecting the liquidity position of the business entity by comparing the current obligation and resources is known as the current ratio.

02

Change in Current Ratio

Due to an increase in the inventories of the business entity, the current assets of the business entity will also increase. An increase in current assets will increase the current ratio because thecurrent assets are reported as the numerator in calculating the current ratio.

03

Liquidity of the Company

The current ratio provides information about the company鈥檚 liquidity. Due to an increase in the current ratio due to an increase in inventory, the company鈥檚 liquidity will also increase as more current assets will be available for paying current liabilities.

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Most popular questions from this chapter

5. A company has purchased a tract of land and expects to build a production plant on the land in approximately five years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:

(a) land expense.

(b) property, plant, and equipment.

(c) an intangible asset.

(d) a long-term investment.

Martinez Corporation engaged in the following cash transactions during 2017.

Sale of land and building $191,000

Purchase of treasury stock 40,000

Purchase of land 37,000

Payment of cash dividend 95,000

Purchase of equipment 53,000

Issuance of common stock 147,000

Retirement of bonds 100,000

Compute the net cash provided (used) by investing activities.

In what section of the balance sheet should the following items appear, and what balance sheet terminology would you use?

(a) Treasury stock (recorded at cost).

(b) Checking account at bank.

(c) Land (held as an investment).

(d) Sinking fund.

(e) Unamortized premium on bonds payable.

(f) Copyrights.

(g) Pension fund assets.

(h) Premium on common stock.

(i) Long-term investments (pledged against bank loans payable).

Use the information presented in BE5-14 for Martinez Corporation to compute the net cash used (provided) by financing activities.

BE5-14 (L05) Martinez Corporation engaged in the following cash transactions during 2017.

Sale of land and building $191,000

Purchase of treasury stock 40,000

Purchase of land 37,000

Payment of cash dividend 95,000

Purchase of equipment 53,000

Issuance of common stock 147,000

Retirement of bonds 100,000

Compute the net cash provided (used) by investing activities.

Differentiate between operating activities, investing activities, and financing activities.
See all solutions

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