The balance sheet for Peterson Manufacturing Company is presented below.
Peterson Mfg. Co.
Balance Sheet
December 31, 1995
Cash $32,000 Current liabilities $72,000
Accounts receivable 40,000 Long-term liabilities 48,000
Inventories 48,000 Common equity 120,000
Total current assets $120,000
Net fixed assets 120,000
Total $240,000 Total $240,000
During 2009, the firm earned $28,000 after taxes based on net sales of $480,000.
a. Calculate Peterson's current ratio and net working capital.
b. Assume that Peterson's uses $20,000 of its cash to reduce current liabilities. Recompute the current ratio and net working capital.
c. What effect, if any, does the change proposed in question b have on Peterson's liquidity.

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The Answer of The balance sheet for Peterson Manufacturing Company is presented below.
Peterson Mfg. Co.
Balance Sheet
December 31, 1995
Cash $32,000 Current liabilities $72,000
Accounts receivable 40,000 Long-term liabilities 48,000
Inventories 48,000 Common equity 120,000
Total current assets $120,000
Net fixed assets 120,000
Total $240,000 Total $240,000
During 2009, the firm earned $28,000 after taxes based on net sales of $480,000.
a. Calculate Peterson's current ratio and net working capital.
b. Assume that Peterson's uses $20,000 of its cash to reduce current liabilities. Recompute the current ratio and net working capital.
c. What effect, if any, does the change proposed in question b have on Peterson's liquidity.

The Balance Sheet for Peterson Manufacturing Company Is Presented Below