Chapter 15: Q1DC (page 857)

Lance Berkman is the controller of Saturn, a dance club whose year-end is December 31. Berkman prepares checks for suppliers in December, makes the proper journal entries, and posts them to the appropriate accounts in that month. However, he holds on to the checks and mails them to the suppliers in January.
Requirements
1. What financial ratio(s) is(are) most affected by the action to hold onto the checks until January?
2. What is Berkman’s purpose in undertaking this activity?

Short Answer

Expert verified

Financial ratio affected are current ratio, quick ratio and cash ratio.
Purpose of Berkman’s this activity is to show that liquidity of firm is good.

Step by step solution

Financial ratio get affected:

Financial ratios like current ratio, quick ratio, and cash ratio get affected because, in calculating all these ratios, accounts payable and cash are involved as the value of these changes’ ratio gets impacted.

Berkmans Purpose

Berkman’s purpose is to show that firm has good short-term liquidity by lowering the book value of the liability and keeping assets unaffected. Berkman's activity of posting checks amount to respective account brings down the liability value, but payment is not made cash remain unaffected, which improve the liquidity ratio.

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	All digital	Green Zone
Net sales revenue (all on credit)	\(417,925	\)493,115
Cost of goods sold	209,000	258,000
Interest expenses	0	14,000
Net income	58,000	72,000

	All digital	Green Zone
Current assets:
Cash	\(23,000	\)18,000
Short-term investment	37,000	17,000
Accounts receivables, Net	39,000	49,000
Merchandise inventory	64,000	102,000
Prepaid expenses	21,000	17,000
Total current assets	\(184,000	\)203,000
Total assets	\(263,000	\)326,000
Total current liabilities	105,000	99,000
Total liabilities	105,000	134,000
Common stock:
\(1 par (10,000 shares)	10,000
\)2 par (14,000 shares)		28,000
Total stockholder’s equity	158,000	192,000
Market price per share of common stock	92.80	128.50
Dividend paid per common share	1.20	0.90

	All digital	Green Zone
Balance sheet:
Accounts receivables, Net	\(41,000	\)54,000
Merchandise inventory	81,000	89,000
Total assets	258,000	277,000
Common stock:
\(1 par (10,000 shares)	10,000
\)2 par (14,000 shares)		28,000

Short Answer

Step by step solution

Financial ratio get affected:

Berkmans Purpose

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