(Learning Objective 6: Analyze and evaluate liquidity and debt-paying ability) LO 6McClain Company’s condensed and adapted balance sheet at December 31, 2018, follows:(In millions)Total current assets....................................................... $15.9Property, plant, equipment, and other assets................. 16.2$32.1Total current liabilities.................................................. $ 9.6Total long-term liabilities.............................................. 5.5Total shareholders’ equity............................................. 17.0$32.1Assume that during the first quarter of the following year, 2019, McClain completed the following transactions:a. Earned revenue of $2.8 million, on account.b. Borrowed $7.0 million in long-term debt.c. Paid half of the current liabilities.d. Paid selling expense of $0.6 million.e. Accrued general expense of $0.8 million. Credit General Expense Payable, a currentliability.f. Purchased equipment for $4.6 million, paying cash of $1.9 million and signing along-term note payable for $2.7 million.g. Recorded depreciation expense of $0.4 million.Requirements1. Calculate McClain’s current ratio and debt ratio at December 31, 2018. Round to twodecimal places.2. Consider each transaction separately. Calculate McClain’s current ratio and debt ratio aftereach transaction during 2019—that is, seven times. Round ratios to two decimal places.3. Complete the following statements with either “increase” or “decrease”:a. Revenues usually the current ratio.b. Revenues usually the debt ratio.c. Expenses usually the current ratio. (Note: Depreciation is an exceptionto this rule.)d. Expenses usually the debt ratio.e. If a company’s current ratio is greater than 1.0, as for McClain, paying off a currentliability will always the current ratio.f. Borrowing money on long-term debt will always the current ratio andthe debt ratio.
(Learning Objective 6: Analyze and evaluate liquidity and debt-paying ability) LO 6
McClain Company’s condensed and adapted
(In millions)
Total current assets....................................................... $15.9
Property, plant, equipment, and other assets................. 16.2
$32.1
Total current liabilities.................................................. $ 9.6
Total long-term liabilities.............................................. 5.5
Total shareholders’ equity............................................. 17.0
$32.1
Assume that during the first quarter of the following year, 2019, McClain completed the following transactions:
a. Earned revenue of $2.8 million, on account.
b. Borrowed $7.0 million in long-term debt.
c. Paid half of the current liabilities.
d. Paid selling expense of $0.6 million.
e. Accrued general expense of $0.8 million. Credit General Expense Payable, a current
liability.
f. Purchased equipment for $4.6 million, paying cash of $1.9 million and signing a
long-term note payable for $2.7 million.
g. Recorded
Requirements
1. Calculate McClain’s
decimal places.
2. Consider each transaction separately. Calculate McClain’s current ratio and debt ratio after
each transaction during 2019—that is, seven times. Round ratios to two decimal places.
3. Complete the following statements with either “increase” or “decrease”:
a. Revenues usually the current ratio.
b. Revenues usually the debt ratio.
c. Expenses usually the current ratio. (Note: Depreciation is an exception
to this rule.)
d. Expenses usually the debt ratio.
e. If a company’s current ratio is greater than 1.0, as for McClain, paying off a current
liability will always the current ratio.
f. Borrowing money on long-term debt will always the current ratio and
the debt ratio.
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