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The chief financial officer (CFO) of Padilla Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2012, 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.
PADILLA CORP. Balance Sheet 12/30/2012
Current assets
Current liabilities
Cash
$25,000
Accounts payable
$20,000
Accounts receivable
30,000
Salaries and wages payable
10,000
$30,000
Prepaid insurance
5,000
$60,000
Long-term liabilities
Equipment (net)
200,000
Notes payable
80,000
Total assets
$260,000
Total liabilities
110,000
Stockholders" equity
Common stock
100,000
Retained earnings
50,000
150,000
Total liabilities and
stockholders" equity
Instructions
(a) Calculate the current ratio and working capital based on the preliminary balance sheet.
(b) Based on the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2012. Calculate the new current ratio and working capital after the company takes these actions.
(c) Discuss the pros and cons of the current ratio and working capital as measures of liquidity.
(d) Was it unethical for the CFO to take these steps?
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