Jennifer Frye, CFA, is comparing the financial performance of a firm that presents its results under IFRS to that of a firm that complies with US GAAP. The US firm uses the LIFO method for inventory accounting and the other firm uses the FIFO method. IF Frye performs the appropriate adjustments ot make the US firms financial statements comparable to the firm that reports under IFRS, her adjustments are least likely to change the firms… Quick ratio…?? Why. A company uses cash to pay off short-term notes payable. If the company’s current ratio before the transaction is 2.0 times and the quick ratio was 1.0 times, how would this transaction affect the company’s current, quick and debt ratios? CR \ QR \ D/E Increase Increase Decrease Decrease Decrease Increase Increase Remain Unchanged Decrease Decrease Remain Unchange Increase Ok why does the quick remain the same??? Cash was used??? im so lost here.
CR = 2 QR = 1 Since Note payables are paid off, debt reduces, so Debt / Equity reduces. So choices A and C are the only possible ones. Cash Reduces, Notes Payables reduces as well. So CR = CA / CL == both CA and CL are changing by the same amount. Since CR = 2 lets say CA = 200, CL = 100 New CA = 200 - 10, new CL = 100 - 10 so new CR = 190 / 90 = 2.xxx so CR increases QR = (CA - Inv) / CL In the above CA = 200, and since QR = 1 ==> Inv = 100 QR new = (200 - 100 - 10) / (100 - 10) = 90/90 = 1 So QR remains unchanged. Choice C Since CA and CL changed due to something other than Inventory, QR
Agree… Answer should be C…
When you convert LIFO to FIFO you have increased the value of your inventory and increased your retained earnings ( =>Equity ) This increases your Current Ratio (CR) because your current asset value increased Quick ratio remains unchanged because the numerator for the ratio (Cash + Martk’ble Sec + Recv’bles ) remains unchanged by the change in inventory value. Debt to equity (D/E) decreases because your equity value has increased Thus Answer is C