Question

A. The chief financial officer (CFO) of Crane Corporation requested that the accounting department prepare a preliminary statement of financial position on December 20, 2018. He knows that certain debt agreements with its lenders require the company to maintain a current ratio of at least 2:1 and wants to know how the company is doing. The preliminary statement of financial position follows: CRANE CORPORATION Statement of Financial Position December 20, 2018 Assets Liabilities Current assets Current liabilities     Cash $22,000     Accounts payable $20,000     Accounts receivable 31,000     Salaries payable 20,000 $40,000     Prepaid insurance 5,000 Non-current liabilities     Total current assets 58,000     Bank loan payable 70,000     Equipment 250,000 Total liabilities 110,000 Total assets $308,000 Shareholders’ equity     Common shares $90,000     Retained earnings 108,000 198,000 Total liabilities and shareholders’ equity $308,000

Calculate the current ratio based on the data in the preliminary statement of the financial position. (Round current ratio to 1 decimal place, e.g. 5.2)
Current ratio ______: 1

Based on the results in (a), the CFO requested that $20,000 of the cash be used to pay off the balance of the accounts payable account on December 21. Calculate the current ratio after this payment is made, assuming there are no further changes to current assets and current liabilities. (Round current ratio to 1 decimal place, e.g. 5.2)

Current ratio ______: 1

B. The chief financial officer (CFO) of Whispering Winds Corporation requested that the accounting department prepare a preliminary statement of financial position on December 30, 2018, 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 statement of the financial position is as follows.

WHISPERING WINDS CORP. Statement of Financial Position December 30, 2018
Assets						Liabilities and Shareholders’ Equity
Current assets						Current liabilities
Cash		$30,400				Accounts payable		$26,000
Accounts receivable		30,400				Salaries payable		15,800		$41,800
Prepaid insurance		10,260		$71,060		Non-current liabilities
Property, plant, and equipment (net)				196,940		Bank loan payable				85,800
Total assets				$268,000		Total liabilities				127,600
						Shareholders’ equity
						Common shares		100,100
						Retained earnings		40,300		140,400
						Total liabilities and shareholders’ equity				$268,000

Calculate the current ratio and working capital based on the preliminary statement of financial position at December 30, 2018. (Round current ratio to 1 decimal place, e.g. 2.1.)

Current ratio		______	: 1
Working capital		$

Based on the results in (a), the CFO requested that $25,800 of cash be used to pay some of the balance of the accounts payable account on December 31, 2018. Calculate the new current ratio and working capital after the company takes these actions. (Round current ratio to 1 decimal place, e.g. 2.1.)

Current ratio		______	: 1
Working capital		$

Answer 1

Answer to Part A

Current Assets = Cash + Accounts Receivable +Prepaid Insurance

= $22000+31000+5000 =$ 58000

Current Liabilities = Accounts Payable + Salaries Payable

= $20000 + 20000 = $40000

Current Ratio = Current Assets /Current Liabilities

= 58000/40000

= 1.45 : 1

CFO Request

Current Assets = Cash +Accounts Receivable +Prepaid Insurance

= 2000(22000 - 20000) + 31000 + 5000

= $ 38000

Current Liabilities = Salaries Payable (Accounts Payable are zero after payment)

= 20000

=$20000

Current Ratio =Current Assets /Current Liabilities

=38000/20000

= 1.9 : 1

Answer to Part B

Current Assets = Cash + Accounts Receivable +Prepaid Insurance

= $30400 +30400 +10260 =$ 71060

Current Liabilities = Accounts Payable + Salaries Payable

= $26000 + 15800 = $41800

Current Ratio = Current Assets /Current Liabilities

= 71060/41800

= 1.7 : 1

Working Capital = Current Assets - Current Liabilities

= $71060 - 41800

=$ 29260

CFO Request

Current Assets = Cash +Accounts Receivable +Prepaid Insurance

= 4600 (30400 - 25800) + 30400 +10260

= $45260

Current Liabilities = Accounts Payable +Salaries Payable

= 200 (26000 - 25800) + 15800

=16000

Current Ratio =Current Assets /Current Liabilities

=45260 /16000

= 2.8 : 1

Working Capital =Current Assets - Current Liabilities

=45260 - 16000

= $29260