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To: Katie Pearson, Accounting Manager From: Jim Strong, Staff Accountant RE: New plans effect on liquidity ratio Date: January 4, Year 7

Good morning Katie,

I have reviewed the financial statements. Please see my analysis of the three options below.

1.If we implement Option 1, the current ratio and the quick ratio will increase. Accounts receivable, accounts payable, and cash will increase.

Choose an option below:

[Original Text] and the quick ratio will increase. Accounts receivable, accounts payable, and cash will increase.

and the quick ratio will increase. Option 1, which causes equal changes in current assets and current liabilities, has a proportionally greater effect on current assets.

and the quick ratio will remain the same. The decrease in accounts receivable and the increase in accounts payable are offset by the increase in cash.

will increase, but the quick ratio will decrease because the quick ratio excludes inventories from the numerator.

and the quick ratio will decrease. Option 1, which causes equal changes in current assets and current liabilities, has a proportionally greater effect on current liabilities.

2. If we implement Option 1, working capital will remain the same because the increase in cash is offset by the decrease in accounts receivable and the increase in accounts payable.

Choose an option below:

[Original Text] remain the same because the increase in cash is offset by the decrease in accounts receivable and the increase in accounts payable.

increase because accounts receivable, accounts payable, and cash will increase.

remain the same because the increase in cash is offset by the decrease in accounts receivable. Accounts payable will remain the same.

decrease because the increase in the current liabilities is greater than the increase in the current assets.

increase because the increase in the current liabilities is smaller than the increase in the current assets.

3. If Option 2 is implemented, the current ratio and quick ratio will decrease. Option 2, which causes equal changes in current assets and current liabilities, has a proportionally smaller effect on current assets. The increase in cash is offset by the decrease in accounts receivable.

Choose an option below:

[Original Text] decrease. Option 2, which causes equal changes in current assets and current liabilities, has a proportionally smaller effect on current assets. The increase in cash is offset by the decrease in accounts receivable.

increase. The percentage increase in current liabilities is smaller than the increase in current assets.

increase. The establishment of a zero-balance account increases current assets.

remain the same. The increase in accounts payable is offset by the increase in cash.

4. Also, if Option 2 is implemented, working capital will increase. Accounts payable and cash will increase.

Choose an option below:

[Original Text] increase. Accounts payable and cash will increase.

increase. Current assets will increase.

increase. Accounts payable will decrease and cash will increase.

decrease. Accounts payable will increase and cash will decrease.

decrease. The increase in current assets is less than the increase in current liabilities.

5. If Option 3 is implemented, the quick ratio and working capital will increase. Accounts receivable and cash will increase.

Choose an option below:

[Original Text] and working capital will increase. Accounts receivable and cash will increase.

will remain the same, but working capital will increase.

and working capital will remain the same. Current assets will remain the same.

and working capital will remain the same. The increase in current assets is equal to the increase in current liabilities.

will increase, but working capital will remain the same.

6. Under all three options, the average collection period will decrease.

Choose an option below:

[Original Text] all three options, the average collection period will decrease.

all three options, the average collection period will increase.

Options 1 and 2, the average collection period will decrease.

Options 1 and 3, the average collection period will decrease.

Options 2 and 3, the average collection period will decrease.

THIS IS EMAIL.

To: Jim Strong, Staff Accountant

From: Katie Pearson, Accounting Manager

Subject: New plans effect on liquidity ratios

Date: January 2, Year 7

Hi Jim,

Our firm may implement some new procedures for cash collections and cash payments.

We have three options:

1. Option 1: Open a lockbox in the Royal Bank for receipt of funds. Mail checks to vendors.
2. Option 2: Open a zero balance account for payments. The funds necessary are transferred from an interest-bearing account.
3. Option 3: Open a lockbox in the Royal Bank for receipt of funds.

Currently, our firm directly submits payments to a lockbox provided by vendors. Please analyze the effect of each option on the firms liquidity ratios, based on Year 6 results. Ignore the service fees charged for the new procedures. Attached are the financial statements.

I look forward to seeing your analysis.

Thank you,

Katie

INCOME STATEMNT

Aaron Co.
Income Statement
Year ending December 31, Year 6
Revenue
Sales	$ 5,750,000
Sales returns & allowances	(225,000)
Net sales	$ 5,525,000
Cost of goods sold	$(1,725,000)
Gross profit	$ 3,800,000
Operating Expenses
Salaries and wages	$ 1,200,000
Payroll expenses	476,000
Repairs and maintenance	138,000
Rent expense	36,000
Utilities	11,000
Depreciation expense	340,000
General office expense	78,000
Travel	4,000
Total operating expenses	$ 2,283,000
Operating income	$ 1,517,000
Other Income and Expenses
Other income	$ 15,000
Other expenses	(7,500)
Total other income and expenses	$ 7,500
Income before taxes	$ 1,524,500
Income taxes (25%)	(381,125)
Net income	$ 1,143,375

BALANCE SHEET

Aaron Co.

Comparative Balance Sheets

As of December 31, Year 5, and Year 6

Assets

Year 6

Year 5

Current assets

Cash

$ 350,000

$ 340,000

Accounts receivable

175,000

200,000

Inventory

240,000

285,000

Total current assets

$ 765,000

$ 825,000

Long-term assets

Land

$650,000

$600,000

Equipment

600,000

550,000

Machine set

600,000

600,000

Accumulated depreciation

(590,000)

(470,000)

Total long-term assets

$1,260,000

$1,280,000

Total assets

$2,025,000

$2,105,000

Liabilities

Current liabilities

Accounts payable

$ 125,000

$ 120,000

Accrued expenses

150,000

155,000

Total current liabilities

$ 275,000

$ 275,000

Long-term liabilities

425,000

325,000

Total liabilities

$ 700,000

$ 600,000

Owners equity

Retained earnings

$1,225,000

$1,305,000

Common stock

100,000

200,000

Total owners equity

$1,325,000

$1,505,000

Total liabilities and owners equity

$2,025,000

$2,105,000