Question

At December 31, 2024, Stacy McGill Corporation reported current assets of $370,000 and current liabilities of $200,000. The following items may have been recorded incorrectly. McGill uses a perpetual inventory system.

1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28. McGill received and recorded the invoice on December 29, 2024, but the goods were not included in McGill’s inventory because they were not received until January 4, 2025.
2. Goods purchased costing $15,000 were shipped f.o.b. destination by a supplier on December 26. McGill received and recorded the invoice on December 31, but the goods were not included in McGill’s 2024 inventory because they were not received until January 2, 2025.
3. Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31, 2024, inventory at $13,000.

Instructions
Compute the current ratio based on McGill’s balance sheet.

Answer 1

The current ratio for Stacy McGill Corporation is calculated by adjusting for inventory shipped f.o.b. shipping point and goods on consignment. After adjustments, the current assets total $379,000, resulting in a current ratio of 1.895 when divided by current liabilities of $200,000.

Step-by-step explanation:

To compute the current ratio, we need to adjust Stacy McGill Corporation's reported current assets and current liabilities based on the information about inventory and consignment goods. The current ratio is calculated by dividing current assets by current liabilities.

• Goods costing $22,000 shipped f.o.b. (freight on board) shipping point should be included in McGill's inventory as of December 31, 2024, because the ownership of the goods transfers to the buyer as soon as the goods are shipped.
• Goods costing $15,000 shipped f.o.b. destination should not be included until they are received; therefore, no adjustment is needed since they were not recorded in the 2024 inventory.
• Goods held on consignment should not be included in McGill's inventory because they are owned by the consignor (Claudia Kishi Company) until they are sold. Therefore, the $13,000 should be deducted from McGill's reported current assets.

Adjusted current assets = Originally reported current assets + Goods received f.o.b. shipping point - Goods on consignment

Adjusted current assets = $370,000 + $22,000 - $13,000 = $379,000

Current ratio = Adjusted current assets / Current liabilities

Current ratio = $379,000 / $200,000 = 1.895

The adjusted current ratio for Stacy McGill Corporation is 1.895, which reflects the company's ability to pay short-term obligations with its current assets.