Question

The Jamesway Printing Corporation has current assets of $3.5 million. Of this total, $1.2 million is inventory, $0.6 million is cash, $1.0 million is accounts receivable, and the balance is marketable securities. Jamesway has $1.6 million in current liabilities. Round your answers to two decimal places.

1. What are the current and the quick ratios for Jamesway?
   Current ratio:  x

   Quick ratio:  x

2. If Jamesway takes $0.2 million in cash and pays off $0.2 million of current liabilities, what happens to its current and quick ratios? What happens to its real liquidity?
   New current ratio:  x

   New quick ratio:  x

3. If Jamesway sells $0.6 million of its accounts receivable to a bank and uses the proceeds to pay off short-term debt obligations, what happens to its current and quick ratios?
   New current ratio:  x

   New quick ratio:  x

4. If Jamesway sells $1.0 million in new stock and places the proceeds in marketable securities, what happens to its current and quick ratios?
   New current ratio:  x

   New quick ratio:  x

Answer 1

a.

Current Ratio = Current Assets / Current Liablities

= 3.5 / 1.6

= 2.19

Quick ratio = (Current Assets - Inventory) / Current Liabilities

= (3.5 - 1.2) / 1.6

= 2.3 / 1.6

= 1.44

b.

New Current Ratio = (3.5-0.2) /(1.6-0.2)

= 3.3 / 1.4

= 2.36

Quick Ratio = (3.5-1.2-0.2) / (1.6-0.2)

2.1 / 1.4

1.5

If the current ratio or quick ratio increase means availability of current assets or Quick assets to pay off the current liablities increases, hence the real liquidity improves

C

New current ratio = (3.5-0.6) / (1.6-0.6)

= 2.9 /1

= 2.9

New Quick ratio = (3.5-1.2-0.6) / (1.6-0.6)

= 1.47 / 1

= 1.47

D

New current ratio = (3.5+1) /1.6

4.5 /1.6

= 2.81

New Quick ratio = (3.5-1.2+1) /1.6

= 3.3 /1.6

2.06

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