/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} 5 Perez Company reported an increa... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

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.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The bookkeeper for Geronimo Company has prepared the following balance sheet as of July 31, 2017.

GERONIMO COMPANY

Balance Sheet

As of July 31, 2017

Cash

\(69,000

Notes and accounts payable

\)44,000

Account receivable (net)

40,500

Long-term liabilities

75,000

Inventory

60,000

Stockholder鈥檚 equity

155,500

Equipment (net)

84,000

Patents

21,000

\(274,500

\)274,500

The following additional information is provided.

1. Cash includes \(1,200 in a petty cash fund and \)15,000 in a bond sinking fund.

2. The net accounts receivable balance is comprised of the following two items: (a) accounts receivable \(44,000 and (b) allowance for doubtful accounts \)3,500.

3. Inventory costing \(5,300 was shipped out on consignment on July 31, 2017. The ending inventory balance does not include the consigned goods. Receivables in the amount of \)5,300 were recognized on these consigned goods.

4. Equipment had a cost of \(112,000 and an accumulated depreciation balance of \)28,000.

5. Income taxes payable of $6,000 were accrued on July 31. Geronimo Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance but was offset against the income taxes payable amount.

Instructions

Prepare a corrected classified balance sheet as of July 31, 2017, from the available information, adjusting the account balances using the additional information.

What are the major limitations of the balance sheet as a source of information?

Presented below is a condensed version of the comparative balance sheets for Zubin Mehta Corporation for the last two years at December 31.

2017

2016

Cash

\(177,000

\)78,000

Accounts receivables

180,000

185,000

Investment

52,000

74,000

Equipment

298,000

240,000

Accumulated depreciation

(106,000)

(89,000)

Current liabilities

134,000

151,000

Common stock

160,000

160,000

Retained earnings

307,000

177,000

Additional information:

Investments were sold at a loss of \(10,000; no equipment was sold; cash dividends paid were \)30,000; and net income was $160,000.

Instructions

(a) Prepare a statement of cash flows for 2017 for Zubin Mehta Corporation.

(b) Determine Zubin Mehta Corporation鈥檚 free cash flow.

P5-4 (L03) GROUPWORK (Preparation of a Corrected Balance Sheet) The balance sheet of Kishwaukee Corporation as of December 31, 2017, is as follows.

KISHWAUKEE CORPORATION

Balance Sheet

December 31, 2017

Assets

Goodwill (Note 2)

\(120,000

Building (Note 1)

1,640,000

Inventory

312,100

Land

950,000

Accounts receivable

170,000

Treasury Stock (50,000 shares)

87,000

Cash on hand

175,900

Assets allocated to trustee for plant expansion

Cash in bank

70,000

Debt investment (held to maturity)

138,000

\)3,663,000

Equities

Note payable (Note 3)

\(600,000

Common stock authorized and issue, 1,000,000 shares no par

1,150,000

Retained earnings

103,000

Non-controlling Interest

55,000

Appreciation capital (Note 1)

570,000

Income tax payable

75,000

Reserve for depreciation recorded to the date of building

410,000

\)3,663,000

Note 1: Buildings are stated at cost, except for one building that was recorded at appraised value. The excess of appraisal value over cost was \(570,000. Depreciation has been recorded based on cost.

Note 2: Goodwill in the amount of \)120,000 was recognized because the company believed that book value was not an accurate representation of the fair value of the company. The gain of \(120,000 was credited to Retained Earnings.

Note 3: Notes payable are long-term except for the current installment due of \)100,000.

Instructions

Prepare a corrected classified balance sheet in good form. The notes above are for information only

Each of the following items must be considered in preparing a statement of cash flows. Indicate where each item is to be reported in the statement, if at all. Assume that net income is reported as \(90,000.

(a) Accounts receivable increased from \)34,000 to \(39,000 from the beginning to the end of the year.

(b) During the year, 10,000 shares of preferred stock with a par value of \)100 per share were issued at \(115 per share.

(c) Depreciation expense amounted to \)14,000, and bond premium amortization amounted to \(5,000.

(d) Land increased from \)10,000 to $30,000.
See all solutions

Recommended explanations on Business Studies Textbooks

Change Management

Read Explanation

Project Planning & Management

Read Explanation

Managers

Read Explanation

Business Data Analytics

Read Explanation

Influences On Business

Read Explanation

Introduction to Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.