Question

Answer each of the questions in the following unrelated situations.

d) A company has current assets of \(600,000 and current liabilities of \)240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?

Short answer

The current ratio after declaration but before payment is 1.43:1

The current ratio after payment is 1.75:1

Step-by-step solution

Meaning of Cash Dividend

The company's dividend payment responsibility is satisfied by paying cash or by bank transfer when the board of directors declares a portion of earnings to be paid as dividends to shareholders in consideration for their investments in the firm.

Determining the current ratio related to the dividend (d)

Current ratio after declaration but before payment = 1.43:1

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{Assets}}{\mathrm{Current}\mathrm{Liabilities}}\\ & =& \frac{\$600,000}{\$240,000+\$180,000}\\ & =& 1.43:1\end{array}$

Current ratio after payment = 1.75:1

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{assets}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$420,000}{\$240,000}\\ & =& 1.75:1\end{array}$