Question Details

Accounting Homework Help

Which of the following actions would decrease the current ratio (assuming an initial current ratio of 0.8, and current liabilities equal to $1,000,000)?

a. Borrow $100,000 in short term debt and deposit this money (i.e., $100,000) into the firm’s cash account.

b. Borrow $200,000 in long-term debt to buy $200,000 worth of additional inventory.

c. Borrow $50,000 of short-term debt and use the proceeds to pay all operating expenses sooner, thus lowering accruals (i.e., accrued expenses) by $50,000.

d. Sell $250,000 of fixed assets to pay off an equal amount of long-term debt.

e. None of the above – that is, none of the actions listed about will decrease the current ratio.

10. RedCap Manufacturing, Inc. is planning to borrow money by taking out a short termloan (i.e., increase notes payable) and depositing this money directly into the firm’s checking account (i.e., increase cash). RedCap believes that this event will have no affecton either sales or costs, and therefore no affect on net income.

All else constant, this new policy should cause the firm’s quick ratio (assuming an initial quick ratio of 1.5) to:

Decrease

Increase

No Change

Not enough information is provided to answer this question.

11. BlueHat, Inc. is planning to use excess cash that the company has in its checking account (i.e., reduce cash) to pay off a long term loan balance. (i.e., decrease long-term debt). BlueHat believes that this event will have no affect on either sales or costs, and therefore no affect on net income.

All else constant, this new policy should cause the firm’s debt ratio (assuming an initial debt ratio of 45%) to:

Decrease

Increase

No Change

Not enough information is provided to answer this question.

12. GreenChapeau, Inc. is planning to increase its short-term loans (i.e., increase notes payable) to pay for an increase in the firm’s basic inventory level (i.e., increase inventory). GreenChapeau believes that this event will have no affect on either sales or costs, and therefore no affect on net income.

All else constant, this new policy should cause the firm’s current ratio (assuming a current ratio of 1.5) to:

Decrease

Increase

No Change

Not enough information is provided to answer this question.