(Learning Objective 6: Analyzing financial ratios) This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Rockwell Company. Rockwell’s condensed balance sheet at March 31, 20X1, follows.
Total current assets
Properties, net, and other assets
Total current liabilities
Total long-term liabilities
Total stockholders’ equity
a. Paid half the current liabilities.
b. Borrowed $3 million on long-term debt.
c. Earned revenue of $2.5 million on account.
d. Paid selling expense of $1 million.
e. Accrued salary expense of $0.8 million. Credit Salary Payable, a current liability.
f. Purchased equipment for $4.2 million, paying cash of $1.4 million and signing a longterm note payable for $2.8 million.
g. Recorded depreciation expense of $0.6 million.
1. Compute Rockwell’s current ratio and debt ratio at March 31, 20X1. Round to 2 decimal places.)
2. Consider each transaction separately. Compute Rockwell’s current ratio and debt ratio after each transaction during 20X2, that is, 7 times. Round ratios to 2 decimal places.
3. Based on your analysis, you should be able to readily identify the effects of certain transactions on the current ratio and the debt ratio. Test your understanding by completing these statements with either “increase” or “decrease”:
a. Revenues usually the current ratio.
b. Revenues usually the debt ratio.
c. Expenses usually the current ratio. (Note: Depreciation is an exception to this rule.)
d. Expenses usually the debt ratio.
e. If a company’s current ratio is greater than 1.0, as for Rockwell, paying off a current liability will always the current ratio.
f. Borrowing money on long-term debt will always the current ratio and the debt ratio.