Question

Albert Ellis owns a small plumbing and heating business. His main activities consist of installing and repairing piping systems, plumbing fixtures, and equipment, such as water heaters, particularly for the residential market. His accountant and adviser prepared his financial statements for the current year. The statement of financial position and the statement of income for the year 2012 are presented below.



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-earnedratio?


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  • CreatedDecember 03, 2014
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