compute current ratio after adjustments to inventory are made?

Question

At December 31, 2013, Stacy McGill Corporation reported current assets of $387,000 and current liabilities of $206,100. The following items may have been recorded incorrectly.

1. Goods purchased costing $23,230 were shipped f.o.b. shipping point by a supplier on December 28. McGill received and recorded the invoice on December 29, 2013, but the goods were not included in McGill’s physical count of inventory because they were not received until January 4, 2014.
2. Goods purchased costing $16,840 were shipped f.o.b. destination by a supplier on December 26. McGill received and recorded the invoice on December 31, but the goods were not included in McGill’s 2013 physical count of inventory because they were not received until January 2, 2014.
3. Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31, 2013, physical count of inventory at $16,650.
4. Freight-in of $4,120 was debited to advertising expense on December 28, 2013.


Recompute the current ratio after corrections are made.
By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

Answer 1

CA = Current Assets

CL = Current liabilities



1. Goods purchased costing $23,230 were shipped f.o.b. shipping point by a supplier on December 28. McGill received and recorded the invoice on December 29, 2013, but the goods were not included in McGill’s physical count of inventory because they were not received until January 4, 2014.

CA +$23,230; income +$23,230



2. Goods purchased costing $16,840 were shipped f.o.b. destination by a supplier on December 26. McGill received and recorded the invoice on December 31, but the goods were not included in McGill’s 2013 physical count of inventory because they were not received until January 2, 2014.

CL -$16,840; income +$16,840



3. Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31, 2013, physical count of inventory at $16,650.

CA -$16,650; income -$16,650



4. Freight-in of $4,120 was debited to advertising expense on December 28, 2013.

Assuming this freight-in relates to goods that were not sold off yet by Dec 31, and therefore should be included in ending inventory,

CA +$4,120; income +$4,120



Adjusted CA = $387,000 + $23,230 - $16,650 + $4,120 = $397,700



Adjusted CL = $206,100 - $16,840 = $189,260



Recompute the current ratio after corrections are made.

Current ratio = CA/CL = 397,700/189,260 = 2.1:1



By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

Income before taxes will increase by $27,540

Answer 2

1

Answer 3

Mc Gill Corp