1 answer

At the end of 2021, Barker Corporation’s preliminary trial balance indicated a current ratio of 1.3....

Question:

At the end of 2021, Barker Corporation’s preliminary trial balance indicated a current ratio of 1.3. Management is contemplating paying some of its accounts payable balance before the end of the fiscal year. Determine whether the effect this transaction would increase or decrease the current ratio. Would your answer be the same if the preliminary trial balance indicated a current ratio of 0.8?

At the end of 2021, Barker Corporations preliminary trial balance indicated a current ratio of 1.3. Management is contemplat

At the end of 2021, Barker Corporation's preliminary trial balance indicated a current ratio of 1.3. Management is contemplating paying some of its accounts payable balance before the end of the fiscal year. Determine whether the effect this transaction would increase or decrease the current ratio. Would your answer be the same if the preliminary trial balance indicated a current ratio of 0.8? the current ratio. Preliminary trial balance current ratio of 1.3, a payoff of AP would Preliminary trial balance current ratio of 0.8, a payoff of AP would the current ratio.

Answers

Part 1

Current ratiio = 1.3

Let the current assets be = $1,300

And current liabilities = $1,000

Let us also assume that a current liabilities of $100 is paid.

Current assets after payment of AP = current assets - current liabilities paid

= 1,300 - 100

= $1,200

Current liabilities after payment of AP = current liabilities - current liabilities paid

= 1,000 - 100

= $900

Current ratio (After payment of AP)

= Current assets after payment of AP/Current liabilities after payment of AP

= 1,200/900

= 1.33

Part 2

Current ratiio = 0.8

Let the current assets be = $800

And current liabilities = $1,000

Let us also assume that a current liabilities of $100 is paid.

Current assets after payment of AP = current assets - current liabilities paid

= 800 - 100

= $700

Current liabilities after payment of AP = current liabilities - current liabilities paid

= 1,000 - 100

= $900

Current ratio (After payment of AP)

= Current assets after payment of AP/Current liabilities after payment of AP

= 700/900

= 0.78

Preliminary trial balance current ratio of 1.3, a payoff AP would be Increase the current ratio.
Preliminary trial balance current ratio of 0.8, a payoff AP would be Decrease the current ratio.
.

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