ACCOUNTING 4
Running head: ACCOUNTING 1
Accounting
Student’s Name
Institutional Affiliation
Accounting
Q1. What effect will reclassifying the investments have on the current ratio?
According to (Horngren, 2012). If Ross’s Lipstick Company regroups their “long term” investments into cash, it will increase the cash at bank and subsequently the total current assets of the firm, and it will enable them to meet their short term financial obligations without running into debts (Horngren, 2019). It will also lower the current ratio which will fall below 1.50, meaning that the firm is efficient using the current assets to fulfill their immediate monetary responsibilities. “Current ratio is gotten by dividing current properties of a firm by current liabilities.” Hence if the balance of current assets of the firm is great compared to the remainder of its current liabilities, the current ratio will also be excellent in Ross Lipstick’s Company (Horngren, 2019). Therefore, the positive outcome of reclassifying long term security into money on the current ratio will make it higher than it was before the regrouping is done. It means that the firm will not be effective in meeting its short financial obligations. Hence we can conclude that the firm’s fiscal situation does not become resilient by reclassifying savings as the balance of total possessions of the firm.
Q2. Has the management behaved unethically?
Ross Lipstick Company’s long term obligation contract makes certain strains on the business; for instance, the firm might not buy reserves stocks in a surplus of the remaining reserved earnings (Horngren, 2012). The long term debt might not surpass the shareholder’s equity and the current ratio will not drop below 1.50 since the Company does not fulfill the requirements and the lenders or creditors of the firm will have the power to take over the management of the company. Alterations in customer demand will make it hard for Ross Lipstick Company to lure clients and this will cause the current liabilities to increase significantly, and the management will have behaved unethically since they will not be able to pay all their debts, leading to the creditors taking over the firm.
Q3. Explain the financing of operations especially through bonds payable.
It is one of the primary sources of financing available for companies; Bonds signify a requirement to pay back a principal amount at a later date and pay interest. There are several bonds available which the company should engage in; “Serial Bonds: it is given to groups and mature at separate dates (Horngren, 2019). An example is $4,000,000 of successive bonds, $400,000 of which will mature each year from 4-10years after issuance. “Debenture Bonds” are unsecured pledges which need those holding them to rely on the monetary stability of the issuing company and are usually risky than secured bonds.
Q4 Identify the importance of ratio analysis in decision making?
Ratio analysis is fundamental when it comes to making financial decisions within the company, and the conclusion to be made are generally drawn from the financial statements (Horngren, 2012). The company will be able to evaluate the performance of Ross Lipstick Company by scrutinizing its liquidity, profitability asset management and efficiency ratios and will help investors gauge the future performance of the company.
Q5 Apply the method of accounting for current liabilities
Current liabilities of the firm will be recorded in the balance sheet on the credit side, and in the statement of financial position, it will be recorded as expenses which the company incurred over a specified fiscal period (Horngren, 2012). Some of the examples of current liabilities include; Account Payable, income tax payable, accrued expenses, Overdrafts, and Customer deposits.
References
Horngren, C. T. (2019). Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T. (2012). Management and cost accounting. Harlow: Financial Times/Prentice Hall.