Question & Answer: partment prepare a preliminary balance sheet on December 30, 2014, so that the CFO could get an idea of how the company stood. He knows tha…..

Exercise 2-10

The chief financial officer (CFO) of Grienke Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2014, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows.

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Question & Answer: partment prepare a preliminary balance sheet on December 30, 2014, so that the CFO could get an idea of how the company stood. He knows tha…..
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 GRIENKE CORP. Balance Sheet December 30, 2014 Current assets Cash \$26,945 Accounts receivable 31,847 Prepaid insurance 6,702 \$ 65,494 Equipment (net) 201,660 Total assets \$267,154 Current liabilities Accounts payable \$ 21,945 Salaries and wages payable 11,847 \$ 33,792 Long-term liabilities Notes payable 81,702 Total liabilities 115,494 Stockholders’ equity Common stock 100,000 Retained earnings 51,660 151,660 Total liabilities and stockholders’ equity \$267,154

Calculate the current ratio and working capital based on the preliminary balance sheet. (Round Current Ratio to 1 decimal place, e.g. 0.7 : 1)

 Current ratio :1 Working capital \$

Based on the results in (a), the CFO requested that \$21,945 of cash be used to pay off the balance of the accounts payable account on December 31, 2014. Calculate the new current ratio and working capital after the company takes these actions. (Round Current Ratio to 1 decimal place, e.g. 0.7 : 1)

 Current ratio :1 Working capital \$
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1.   Current ratio = Total current assets / Total current liabilities

= [cash \$26,945 + Accounts receivable 31,847 + prepaid insurance 6,702 ] / [ Accounts payable \$21,945 + Salaries and wages payable 11,847]

= \$65,494 / \$33,792

= 1.9 : 1

Working capital = Total current assets – Total current liabilities

= \$65,494 – \$33,792

= \$31702

2. CFO requested that \$21,945 of cash be used to pay off the balance of the accounts payable account on December 31, 2014 ;

Current ratio = Total current assets / Total current liabilities

= [cash (\$26,945 – \$21945 ) + Accounts receivable 31,847 + prepaid insurance 6,702 ] / [ Accounts payable (\$21,945 – \$21945) + Salaries and wages payable 11,847]

= [cash \$5000 + Accounts receivable 31,847 + prepaid insurance 6,702 ] / [ Accounts payable \$0 + Salaries and wages payable 11,847]

= 43549 / 11847

= 3.7 : 1

Working capital = Total current assets – Total current liabilities

= 43549 – 11847

= \$31702