Question

Analyzing the Impact of Selected Transactions on the Current Ratio [LO 13-4, LO 13-5]

In its most recent annual report, Sunrise Enterprises reported current assets of $1,090,000 and current liabilities of $602,000.
Required:
Determine for each of the following transactions whether the current ratio, and each of its two components, for Sunrise will increase, decrease, or have no change: (1) sold long-term assets for cash, (2) accrued severance pay for terminated employees, (3) wrote down the carrying value of certain inventory items that were deemed to be obsolete, and (4) acquired new inventory by signing an 18-month promissory note (the supplier was not willing to provide normal credit terms).

Answer 1

Sunrise Enterprises

Impact of Selected Transactions on the Current Ratio:

Current Ratio Current Assets Current Liabilities

(1) increase increase no change

(2) decrease no change increase

(3) decrease decrease no change

(4) increase increase no change

Step-by-step explanation:

a) Data and Calculations:

Current assets = $1,090,000

Current liabilities = $602,000

Current ratio = 1.8 ($1,090,000/$602,000)

b) The current ratio (the ratio of current assets to current liabilities) is affected by increases or decreases in current assets without equal increases or decreases in current liabilities and vice versa.