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ACC138 - Exhibit 11-3 Interest Payable flaws-weamyable...

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Unformatted text preview: Exhibit 11-3 Interest Payable flaws-weamyable “a.“ I m... . .a.‘ Cement Portion of Long~'I‘_ern1 Notes Payable Accrued Liabilities Unearned Revenue Estimated Warranty Payable PM ‘10 a (continued. . . .l " regirm .y%%..:rmw—w _ «spa-i. _r7--~.---—_:_. Adjust atlyear-end for _ interest insured butnot paid Collect cash finm customer Pay stategevemment I-‘JvWWIIl-I .. ..-, Adjust- at yearned for Pay note I amount due within the next year Adjust at Warned- for- amount _ Pay'saiafies, interest. taxes. etc. irmm'red but not paid Collect cash from customer Delivergoods or services at time of sale Sell- product Makewarranty payments; perform Warranty-Work, or replace product More Ratios for Decision Making a Calculate the current ratio and working capital. Accounting is designed to provide information for decision making by stakeholders. For example, a bank considering lending money to a company must predict: Whether the company can repay the loan. If the business already has a lot of debt,‘ repayment is less certain than-if it doesn’t owe too much money. Two of the most widely used decision aids in assessing the short-term liquidity of a business are the current ratio and the measure of working capital. fits esrréhr saris meetings mw-y’eab’ilifiyrm pay-its Cuffinfi‘figbili- ties by comparing those liabilities against current assets. It is computed as follows: Current Ratio = Current Assets/Current Liabilities A company prefers to have a high current ratio because that means it has plenty of current assets to pay current liabilities. An increasing current ratio over time indicates improvement in a company's ability to pay current debts. A rule of thumb is that a strong current ratio is 1.50, which indicates that the company has $1.50 in current assets for every $1.00 in current liabilities. Hence, a com- pany with a current ratio of 1.50 would probably have little trouble paying its current liabilities. A current ratio of 1.00 is considered low. A related measure is working capital. ' Wbrking Capital 2 Current Assets — Current Liabilities Working capital also measures a company’s ability to meet short-term obligations with current assets. A positive result indicates that the business has more cur- rent assets than it has current liabilities, and thus shOWs that current assets could pay current liabilities. A negative result indicates the opposite; current liabilities are greater than the current assets of the entity. ...
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