Question

The statement of financial position (extract) of Kent Pty Ltd as at 30 June 2019 is...

The statement of financial position (extract) of Kent Pty Ltd as at 30 June 2019 is given below:

Kent Pty Ltd

Statement of Financial Position

As at 30 June 2019

Current Assets

Current Liabilities

Cash

Receivables

Inventories

Prepaid expenses

360 000

251 200

540 800

  49 600

$1 201 600

Payables

Other liabilities

360 000

416 000

            

$776 000

The company signed a loan agreement in early 2019 that requires the company to maintain a minimum current ratio of 1.6:1. Management has become concerned that this requirement may not be met and thus plans to conduct one of the following transactions on the last day of the financial year.

Purchase $24 000 worth of inventory on credit.

Borrow $50,000 using a long-term bank loan.

Required:

Which of the above transactions would you recommend to the management? Why? Show your workings to support your conclusion.

You may use the following formula for your calculation

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = (Cash assets + Receivables)/Current Liabilities

Debt Ratio = Total liabilities/Total assets

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