Current Ratio Loan Provision Assume that you are the controller of a small, growing sporting-goods company. The prospects for your firm in the future are quite good, but like many other firms, it has been experiencing some cash-flow difficulties because all available funds have been used to purchase inventory and to finance start-up costs associated with a new business. At the beginning of the current year, your local bank advanced a loan to your company. Included in the loan is the following provision: The company is obligated to pay interest payments each month for the next five years. Principal is due and must be paid at the end of Year 5. The company is further obligated to maintain a current assets to current liabilities ratio of 2 to 1 as indicated on quarterly statements to be submitted to the bank. If the company fails to meet any loan provisions, all amounts of interest and principal are due immediately upon notification by the bank. You, as controller, have just gathered the following information as of the end of the first month of the current quarter: Current liabilities: Accounts payable Taxes payable Accrued expenses Total current liabilities $400,000 100,000 50,000 $550,000 You are concerned about the loan provision that requires a 2 to 1 ratio of current assets to current liabilities. Required: 1. Indicate what actions could be taken during the next two months to meet the loan provision. Which of the available actions should be recommended? If the firm wishes to achieve a 2 to 1 ratio, it must current assets, current liabilities, or both. One option would be to request from the bank a long-term line of credit to be used to 2. Could management take short-term actions to make the company's liquidity appear to be better? What are the long-run implications of such actions? Management to pay current liabilities which in many cases will the current ratio. This is referred to as and would only be beneficial in the