Indicate the Effect of the Following Actions on Cash Levels

question 82

Essay

Indicate the effect of the following actions on cash levels and current ratio. Assume the company has a current ratio greater than one. Indicate whether the effect is to increase (I), decrease (D) or if it has no effect (NE). Consider each action independently of others. $\begin{array}{lr}&\text { Current Ratio}&\text { Cash }\\ \text { Increased credit limits to maintain sales levels } &\\ \text { Convert to just-in-time inventory system } &\\ \text { Change from FIFO to weighted average inventory } &\\ \text { method (rising prices)} &\\ \text { Pay suppliers more slowly} &\\ \text {Sell accounts receivable at face value } &\\ \text { Capitalize leases that were previously classified} &\\ \text {as operating leases } &\\ \text { Increase bad debt expense } &\\ \text { Sell equity} &\\ \text { Issue stock dividend} &\\ \text { Write-down inventory} &\\ \text { } &\\\end{array}$

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Definitions:

Externalities

Unintended outcomes from business transactions impacting external groups, not included in the product or service pricing.

Coase Theorem

A principle that asserts that when trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property.

Government Intervention

The involvement of the government in the market, aiming to alter the allocation of resources and distribution of goods and services.

Efficient Outcome

An economic situation in which all resources are allocated in the most effective way possible, maximizing potential benefit.