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- February 26, 2017 at 7:19 am #374263
Two questions that i’m not clear on:
Fifer Co has a current ratio of 1.2:1 which is below the industry average. Fifer Co wants to increase its current ratio by the year end.
Which of the following actions, taken before the year end, would lead to an increase in the current ratio?
a) Return some inventory which had been purchased for cash and obtain a full refund on the cost
b) Make a bulk purchase of inventory for cash to obtain a large discount
c) Make an early payment to suppliers, even though the amount is not due
d) Offer early payment discounts in order to collect receivables more quickly
The answer is c but i cant see why it shouldn’t be d.
Next Question:
On 1 October 20X8, Picture Co acquired 60% shares in Frame Co. At 1 April 20X8, the credit balances on the revaluation surpluses relating to Picture Co and Frame Co’s equity financial asset investments stood at $6,400 and $4,400 respectively.
The following extract was taken from the financial statements for the year ended 31 March 20X9:
Other comprehensive income: loss on fair value of equity financial asset investments
Picture Co ($) (1,400)
Frame Co ($) (800)Assume the losses accrued evenly throughout the year.
What is the amount of the revaluation surplus in the consolidated statement of financial position of Picture Co as at 31 March 20X9?
$4,520
$4,760
$5,240
$9,160
I got 9160, but the answer is 4520?
Many many thanks!
February 26, 2017 at 9:34 am #374288For the first one, imagine we have current assets of $1,200,000 and current liabilities of $1,000,000
That’s a current ratio of 1.2:1
Now pay $200,000 to payables
Current assets are now $1,000,000 and current liabilities are $800,000 – that’s a current ratio of 1.25:1
I suggest that it’s a really good idea to play around with “say” figures when faced with a question like this!
Option (d)?
If no one takes up the offer – then there’s no change to the current ratio
If receivables DO take up the offer, we’re exchanging assets of, say $1,000 for other assets (cash) of $900
How do you begin to imagine that this is going to improve the current ratio?!!!!!
Second question? Should be a separate post!
Your answer has included the whole of the pre-acquisition revaluation reserve from Frame
You have taken:
6,400 Picture’s own
4,400 100% of Frame pre-acquisition
(1,400) Picture’s devaluation
(240) 60% x 6/12 x Frame’s devaluation (60% x 6/12 x 800)and arrived at the total of $9,160
Are you sure the answer is $4,520?
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