The chief financial officer (CFO) of Grienke Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2014, so 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.

GRIENKE CORP.
Balance Sheet December 30, 2014 Current assets Current liabilities Cash $25,000 Accounts payable $ 20,000 Accounts receivable 30,000 Salaries and wages payable 10,000 $ 30,000 Prepaid insurance 5,000 $ 60,000 Long-term liabilities Equipment (net) 200,000 Notes payable 80,000 Total assets $260,000 Total liabilities 110,000 Stockholders’ equity Common stock 100,000 Retained earnings 50,000 150,000 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 $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2014.
Calculate the new current ratio and working capital after the company takes these actions.

(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?AppendixLO1