Show the Effect of the Following Transactions on Cash, Net

question 80

Essay

Show the effect of the following transactions on cash, net working capital, and the current ratio. Assume that the current ratio exceeds 1.0 to begin.
a. The firm borrows $1,000 short term and pays $500 in accounts payable.
b. The firm factors $1,000 in receivables at a 5% discount.
c. The firm issues $1,000 in long-term bonds, using the proceeds to pay $800 in payables and purchase $200 in marketable securities.

---

Definitions:

Depreciation Tax Shield

The reduction in taxable income for businesses that results from claiming depreciation expenses, thereby lowering tax liabilities.

Break-Even Lease Payment

The lease payment amount at which the cost of leasing equals the cost of owning, resulting in no net profit or loss.

Straight-Line Method

A technique in accounting for evenly spreading the cost of an asset over its useful life.

Net Advantage to Leasing

The potential financial benefits gained from leasing an asset, compared to purchasing it outright, considering taxes, maintenance, and other factors.