Chapter 2, Problem 2.10E

(a)

To determine

Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Formula of current ratio:

$\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}$

Working capital: The measure which evaluates the ability of a company to pay off the short-term debt obligations, by computing the excess of current assets over current liabilities is referred to as working capital. This ratio assesses the liquidity of a company.

Formula of working capital:

$\text{Working capital = Current assets – Current liabilities}$

To compute: (a) Current ratio and working capital, (b) New current ratio and working capital after making the said adjustments, (c) Explain the pros and cons of current ratio and working capital (d) Discuss the ethical issues in the decision of chief financial officer (CFO)

(b)

To determine

To compute: (b) New current ratio and working capital after making the said adjustments.

(c)

To determine

To compute: (c) Explain the pros and cons of current ratio and working capital.

(d)

To determine

To compute :(d) Discuss the ethical issues in the decision of chief financial officer (CFO).