[test25]

Assume you work with the CFO of Fashions First, Inc. She reminds you that the fiscal year-end is only two weeks away and that she is looking to you to ensure the company stays in compliance with its loan covenant to maintain a current ratio of 1.25 or higher. A review of the general ledger indicates that current assets total $690,000 and current liabilities are $570,000. Your company has an excess of cash ($300,000) and an equally large balance in accounts payable ($270,000), although none of its accounts payable are due until next month.

Is Fashions First in compliance with its loan covenant?

Assuming the level of current assets and current liabilities remains unchanged until the last day of the fiscal year, evaluate whether Fashions First should pay down $90,000 of its accounts payable on the last day of the year, before the accounts payable become due.

[win2win]

yes, then the Current ratio would come to 1.25 (i.e C.A. = 600000 & C.L. = 480000)

[morgaine300]

Current ratio = current assets divided by current liabilities. Therefore, what is the current ratio now, and does it meet with the bank's requirement?

You're then looking at how these numbers would change if the 90,000 was paid off. How would that affect current assets and current liabilities?