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Current Ratio, Quick Ratio, and Times-Interest-Earned Ratio The following data is from the current accounting records of Florence Company: Cash $360 Accounts receivable (net of allowance of $120) 600 450 240 Inventory Other current assets Accounts payable Other current liabilities 319 510 The president of the company is concerned that the company is in violation of a debt covenant that requires the company to maintain a minimum current ratio of 2.0. He believes the best way to rectify this is to reverse a bad debt write-off in the amount of $30 that the company just recorded. He argues that the write-off was done too early and that the collections department should be given more time to collect the outstanding receivables. The CFO argues that this will have no effect on the current ratio, so a better idea is to use $30 of cash to pay accounts payable early. Florence Company uses the allowance method to account for bad debts. a. Calculate the current ratio under the following scenarios: Round answers to two decimal places. Current ratio (with no action) Current ratio (after reversal of bad debt) Current ratio (after paydown of accounts payable) Which action, if any, should Florence Company take to maintain a minimum 2.0 current ratio? b. Will either the quick ratio or the times-interest-earned ratios be affected by at least one of these ideas? Quick ratio Times-interest-earned ratio 90

Current Ratio, Quick Ratio, and Times-Interest-Earned Ratio The following data is from the current accounting records of Florence Company: Cash $360 Accounts receivable (net of allowance of $120) 600 450 240 Inventory Other current assets Accounts payable Other current liabilities 319 510 The president of the company is concerned that the company is in violation of a debt covenant that requires the company to maintain a minimum current ratio of 2.0. He believes the best way to rectify this is to reverse a bad debt write-off in the amount of $30 that the company just recorded. He argues that the write-off was done too early and that the collections department should be given more time to collect the outstanding receivables. The CFO argues that this will have no effect on the current ratio, so a better idea is to use $30 of cash to pay accounts payable early. Florence Company uses the allowance method to account for bad debts. a. Calculate the current ratio under the following scenarios: Round answers to two decimal places. Current ratio (with no action) Current ratio (after reversal of bad debt) Current ratio (after paydown of accounts payable) Which action, if any, should Florence Company take to maintain a minimum 2.0 current ratio? b. Will either the quick ratio or the times-interest-earned ratios be affected by at least one of these ideas? Quick ratio Times-interest-earned ratio 90

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Current Ratio, Quick Ratio, and Times-Interest-Earned Ratio The following data is from the current accounting records of Florence Company: Cash $360 Accounts receivable (net of allowance of $120) 600 Inventory 450 Other current assets Accounts payable Other current liabilities 240 319 510 The president of the company is concerned that the company is in violation of a debt covenant that requires the company to maintain a minimum current ratio of 2.0. He believes the best way to rectify this is to reverse a bad debt write-off in the amount of $30 that the company just recorded. He argues that the write-off was done too early and that the collections department should be given more time to collect the outstanding receivables. The CFO argues that this will have no effect on the current ratio, so a better idea is to use $30 of cash to pay accounts payable early. Florence Company uses the allowance method to account for bad debts. a. Calculate the current ratio under the following scenarios: Round answers to two decimal places. Current ratio (with no action) Current ratio (after reversal of bad debt) Current ratio (after paydown of accounts payable) Which action, if any, should Florence Company take to maintain a minimum 2.0 current ratio? Quick ratio Times-interest-earned ratio b. Will either the quick ratio or the times-interest-earned ratios be affected by at least one of these ideas? 0 0 + ÷
Transcribed Image Text:Current Ratio, Quick Ratio, and Times-Interest-Earned Ratio The following data is from the current accounting records of Florence Company: Cash $360 Accounts receivable (net of allowance of $120) 600 Inventory 450 Other current assets Accounts payable Other current liabilities 240 319 510 The president of the company is concerned that the company is in violation of a debt covenant that requires the company to maintain a minimum current ratio of 2.0. He believes the best way to rectify this is to reverse a bad debt write-off in the amount of $30 that the company just recorded. He argues that the write-off was done too early and that the collections department should be given more time to collect the outstanding receivables. The CFO argues that this will have no effect on the current ratio, so a better idea is to use $30 of cash to pay accounts payable early. Florence Company uses the allowance method to account for bad debts. a. Calculate the current ratio under the following scenarios: Round answers to two decimal places. Current ratio (with no action) Current ratio (after reversal of bad debt) Current ratio (after paydown of accounts payable) Which action, if any, should Florence Company take to maintain a minimum 2.0 current ratio? Quick ratio Times-interest-earned ratio b. Will either the quick ratio or the times-interest-earned ratios be affected by at least one of these ideas? 0 0 + ÷
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