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 240 319 510 Accounts payable Other current liabilities 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.
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 240 319 510 Accounts payable Other current liabilities 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Question
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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
240
319
510
Accounts payable
Other current liabilities
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?
●
3
Transcribed Image Text: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
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