Value Seller Inc. (VSI) has a short-term working capital loan to help finance its working capital. The terms of the loan enable VSI to borrow an amount up to 35% of its inventory balance and 55% of its  accounts receivable. One of the loan covenants requires that VSI maintain a current ratio greater than 2.0. Information related to VSI’s current assets and current liabilities is shown in the following table:

Required

a. Does VSI satisfy the loan covenant in both years?

b. Based on the loan size requirement only of the loan covenant, how much more could VSI have borrowed in each year?

c. Based on a review of the accounts receivable balances, do you think sales have grown for VSI in 2020 over 2019?

d. How could the company improve its current position to ensure that VSI meets the loan covenant in 2020? What risks, if any, may be associated with the strategy you have suggested?

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In thousands 2020 2019 $ 161 $ 224 Cash 1,218 Accounts receivable 2,100 Inventory 1,352 2,310 Other current assets 336 392 Accounts payable 1,393 1,330 Short-term bank loan 560 280 Other current liabilities 56 112