Hermann Company reported these ratios at December 31, 2014 (dollar amounts in millions): Current ratio = $50
Question:
Hermann Company reported these ratios at December 31, 2014 (dollar amounts in millions):
Current ratio = $50 / $40 = 1.25
Debt ratio = $40 / $70 = 0.57
Hermann Company completed these transactions during 2015:
a. Purchased equipment on account, $8
b. Paid long-term debt, $5
c. Collected cash from customers in advance, $7
d. Accrued interest expense, $2
e. Made cash sales, $6
Determine whether each transaction improved or hurt Hermann’s current ratio and debt ratio.
Step by Step Answer:
a The purchase of equipment on account hurts both ratios b The p...View the full answer
Financial Accounting
ISBN: 978-0133427530
10th edition
Authors: Walter Harrison, Charles Horngren, William Thomas
Related Video
The current ratio is a financial ratio that measures a company\'s ability to pay its short-term obligations with its short-term assets. It is calculated by dividing a company\'s current assets by its current liabilities. The formula for calculating the current ratio is: Current Ratio = Current Assets / Current Liabilities Current assets are assets that can be converted to cash within one year, while current liabilities are debts that are due within one year. A current ratio of 1:1 or greater is generally considered good, as it indicates that a company has enough current assets to cover its current liabilities. A current ratio of less than 1:1 may suggest that a company may have difficulty meeting its short-term obligations. It\'s important to note that the current ratio is just one of many financial ratios that can be used to assess a company\'s financial health. It should be used in conjunction with other financial ratios and qualitative factors to make informed decisions about investing or lending to a company.
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