The chief financial officer (CFO) of Padilla Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2012, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1.
The preliminary balance sheet is as follows.
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PADILLA CORP. Balance Sheet 12/30/2012
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Current assets
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Current liabilities
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Cash
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$25,000
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Accounts payable
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$20,000
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Accounts receivable
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30,000
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Salaries and wages payable
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10,000
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$30,000
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Prepaid insurance
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5,000
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$60,000
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Long-term liabilities
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Equipment (net)
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200,000
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Notes payable
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80,000
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Total assets
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$260,000
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Total liabilities
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110,000
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Stockholders" equity
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Common stock
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100,000
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Retained earnings
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50,000
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150,000
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Total liabilities and
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stockholders" equity
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$260,000
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Instructions
(a) Calculate the current ratio and working capital based on the preliminary balance sheet.
(b) Based on the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2012. Calculate the new current ratio and working capital after the company takes these actions.
(c) Discuss the pros and cons of the current ratio and working capital as measures of liquidity.
(d) Was it unethical for the CFO to take these steps?