Albert Ellis owns a small plumbing and heating business. His main activities consist of installing and repairing
Question:
1. If Albert were to use $80,000 of his cash from the business to pay off some of his trade and other payables, how will this alter his current ratio, quick ratio, and debt-to-total-assets ratio?
2. Albert is trying to keep his inventories at a minimum with only $10,000. However, another plumbing and heating contractor is going out of business and is selling his inventories, valued at $100,000, for only $60,000.
(a) Albert’s son, who is not presently an owner of the business, is considering buying the inventory for cash and, in return, would gain a part ownership in the business. How would this transaction modify the company’s current ratio, quick ratio, and debt-to-total-assets ratio?
(b) Instead of having his son become a shareholder of the business, Albert borrows a working capital loan from the bank for $60,000 at 10% interest. How would that decision affect the ratios identified in (a), as well as the times-interest-earned ratio?
(c) If Albert were to borrow the $60,000 on a long-term basis, how would this decision alter the ratios identified in (a), as well as the times-interest-earned ratio?
Financial StatementsFinancial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
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