Question

Johnny Goodman Inc (JGI) is a large public company that operates in the brewing industry. Selected financial information from their most recent financial statements for the year ending December 31, 2010 is presented below.Current Assets$4,500,000Current Liabilities$2,800,000JGI currently uses the AR (accounts receivable) aging method to value their AFDA (Allowance for Doubtful Account). The accountant tells you that if he had used the percentage of Sales allowance method, the AFDA balance would have been $25,000 higher. If JDI used the percentage of sales allowance method to value the AFDA instead of the AR Aging method, what should be the current ratio

Answer 1

Current assets = $4,500,000

Current liabilities = $2,800,000

If percentage of sales allowance method is used, allowance for doubtful accounts would be $25,000 higher.

Due to higher allowance for doubtful accounts, net Accounts receivable balance would decrease and consequently balance of current assets would also decrease.

Current assets (If percentage of sales allowance method ) is used = 4,500,000-25,000

= $4,475,000

Current ratio = Current assets/ Current liabilities

= 4,475,000/2,800,000

= 1.60