The chief financial officer (CFO) of SuperClean Corporation requested that the and discuss findings. accounting department prepare a preliminary balance sheet on December 30, 2007, so

(SO 4) that the CFO could get an idea of how the company stood. He knows that certain debt

- agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows.

SUPERCLEAN CORP.

Balance Sheet December 30, 2007 Current assets Current liabilities Cash $30,000 Accounts payable $ 25,000 Accounts receivable 20,000 Salaries payable 15,000 $ 40,000 Prepaid insurance 10,000 $ 60,000 Long-term liabilities Notes payable 80,000 Total liabilities 120,000 Property, plant, and equipment (net) 200,000 Stockholders’ equity Total assets $260,000 Common stock 100,000 Retained earnings 40,000 140,000 Total liabilities and stockholders equity $260,000 Instructions

(a) Calculate the current ratio and working capital based on the preliminary balance sheet.

(b) Based on the results in (a), the CFO requested that $25,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2007. Calculate the new current ratio and working capital after the company takes these actions.

Exercises 83

(c) Discuss the pros and cons of the current ratio and working capital as measures of liquidity.

(d) Was it unethical for the CFO to take these steps?