Requirement 2
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
= Acid-Test
Ratio
Southwest $3,548 ÷ $4,650 = 0.76
United Airlines (0.86) also has the best acid-test ratio followed by Southwest (0.76).
Requirement 3
The purchase of additional inventory with cash would not affect the current ratio as
total current assets would remain unchanged. One current asset (inventory) would
ADDITIONAL PerspectiveS
Loss 120,000
Loss 100,000
Continuing Problem: Great Adventures
AP8-1
Requirement 1
The loss is probable and reasonably estimable, so it must be recorded as follows:
Requirement 2
Great Adventures would record a loss and a liability for the minimum amount
($100,000) and disclose the range between $100,000 and $150,000 in the
footnotes to the financial statements. The entry is as follows:
Requirement 1
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
= Current
Ratio
2013 $1,142 ÷ $436 = 2.62
The current ratio weakened in the more recent year.
Requirement 2
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
= Acid-Test
Ratio
2013 $677 ÷ $436 = 1.55
The acid-test ratio also weakened in the more recent year.
Requirement 3
If the likelihood of loss is reasonably possible rather than probable, we record no entry
Requirement 4
If the likelihood of loss is remote, disclosure is usually not required.
Financial Analysis: American Eagle
AP8-2
Requirement 3
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
= Current
Ratio
Before $1,142 ÷ $436 = 2.62
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
= Acid-Test
Ratio
Before $677 ÷ $436 = 1.55
Requirement 1
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
= Current
Ratio
2013 $277 ÷ $129 = 2.15
The current ratio weakened in the more recent year.
Requirement 2
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
= Acid-Test
Ratio
2013 $147 ÷ $129 = 1.14
The acid-test ratio also weakened in the more recent year.
If American Eagle used $100 million in current investments to pay $100 million in
accounts payable, its current ratio and acid-test ratio would improve. The
calculations are provided as follows:
Financial Analysis: The Buckle
AP8-3
Requirement 3
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
= Current
Ratio
Before $277 ÷ $129 = 2.15
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
= Acid-Test
Ratio
Before $147 ÷ $129 = 1.14
Requirement 1
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
= Current
Ratio
American Eagle $1,142 ÷ $436 = 2.62
American Eagle has a slightly better current ratio. Both American Eagle and The
Requirement 2
If The Buckle purchased $50 million of inventory by debiting inventory and crediting
accounts payable, its current ratio and acid-test ratio would weaken. The calculations
are provided as follows:
Comparative Analysis: American Eagle vs. The Buckle
AP8-4
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
= Acid-Test
Ratio
American Eagle $677 ÷ $436 = 1.55
American Eagle also has a better acid-test ratio. Both American Eagle and The Buckle
Requirement 3
The purchase of additional inventory with accounts payable will decrease the current
ratio for American Eagle and The Buckle because their current ratio is above 1.0. In
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
= Current
Ratio
Before $12 ÷ $10.1 = 1.19
After $12 – $1 ÷ $10.1 – $1 = 1.21
Requirement 2
Ethics
AP8-5
Requirement 1
a. In order to record a contingent liability, the loss must be probable and the amount
must be reasonably estimable. A loss and liability will not be recorded for the
b. Western should record warranty expense of $40,000 (2% x $2 million in sales)
rather than just the $25,000 in warranty expense recorded for expenditures incurred
Warranty Expense 15,000
Delaying the purchase of inventory on credit from December 26 to January 3, by
itself, is not unethical. The primary argument in favor of the decision is that it
provides a short-term solution and keeps the company from violating its debt
Internet Research
AP8-6
This case provides an opportunity for students to research stock price and accounting
information on a publicly traded company of their choice. This case also allows
Written Communication
AP8-7
c. The likelihood of loss is reasonably possible rather than probable, so a contingent
Earnings Management
Requirement 2
($ in millions)
Income Before
Warranty Expense −
Warranty
Expense = Net Income
2015 $210 − $50 = $160
2016 $210 − $30 = $180
The executive meeting suggestion does not appear ethical. If the best estimate of
warranty expense for 2015 is $40 million, the CFO should report that amount, even if
AP8-8
Requirement 1
Quattro can use the estimate for warranty expense to manage earnings. If earnings are
low, Quattro can boost earnings by recording less warranty expense this year. If
By recording $50 million in warranty expense in 2015 and $30 million in warranty
Requirement 3