Nashville Do-It-Yourself owns a chain of nine retail stores that sell building materials, hardware, and garden supplies. In early October, the company’s current ratio is 1.7 to 1. This is about normal for the company, but it is lower than the current ratios of several large competitors. Management feels that, to qualify for the best credit terms from its suppliers, the company’s year-end balance sheet should indicate a current ratio of at least 2 to 1.
a. Indicate whether taking each of the following actions would increase or decrease the company’s current ratio. Explain your reasoning.
1. Pay some of the company’s current liabilities.
2. Purchase large amounts of inventory on account.
3. Offer credit customers a special discount if they pay their account balance prior to year-end.
b. Propose several other ethical steps that management might take to increase the company’s current ratio prior to year-end.