In this exercise, you will discuss the impact of cash payment against the accoun

Question

In this exercise, you will discuss the impact of cash payment against the accounts

payable on the current ratio of a company. In addition, you will perform a vertical

analysis against the entries listed on the financial statement.

Task 1: A company has a current ratio of two. The CFO decides to pay off a portion of its

accounts payable with cash. Explain whether the current ratio will increase, decrease, or

remain unchanged. Support your answer with appropriate rationale.

Task 2: Based on the attached financial information, perform a vertical analysis, list the

steps performed, and provide an explanation for your analysis.

Year-2010

Amount in Dollars

Sales 1,00,000

Cost of goods sold 47,500

Operating expenses 750

Selling expenses 9,500

Administrative expenses12,000

Net income 30,250

Year-2009

Sales 79,900

Cost of goods sold 39,950

Operating expenses 500

Selling expenses 9,000

Administrative expenses 12,000

Net income 18,450

Explanation / Answer

Task 1

Current Ratio = Current Assets / Current Liabilities
Reducing accounts payable with cash increases the current ratio if it was initially greater than 1.0. Paying down accounts payable will increase the ratio because current assets and current liabilities will both decrease by the same amount

Task 2

2010 2009 Amount Percent Amount Percent Sales $        100,000 100.00% 79900 79.90% Less:Cost of Goods Sold $        (47,500) 47.50% -39950 39.95% Gross Profit $          52,500 52.50% $ 39,950 39.95% Less: Operating Expenses $              (750) 0.75% -500 0.50% Less: Selling Expenses $          (9,500) 9.50% -9000 9.00% Less: Adminitrative Expenses $        (12,000) 12.00% -12000 12.00% Net income $          30,250 30.25% $ 18,450 18.45%

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