Reference no: EM13483084

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		$260,000

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?