Question

You have been given responsibility for overseeing a bank’s small business loans division. The bank has included loan covenants requiring a minimum current ratio of 1.3 in all small business loans. When you ask which inventory costing method the covenant assumes, the previous loans manager gives you a blank look. To explain to him that a company’s inventory costing method is important, you present the following balance sheet information.

You ask the former loans manager to find amounts for (a), (b), (c), and (d) assuming the company began the year with 3 units of inventory at a unit cost of $12, then purchased 6 units at a cost of $13 each, and finally purchased 4 units at a cost of $17 each. A year-end inventory count determined that 2 units are on hand. References

Current assets other than inventory	$	32
Inventory		(a	)
Other (noncurrent) assets		147
Total assets	$	(b	)
Current liabilities	$	50
Other (noncurrent) liabilities		65
Stockholders’ equity		(d	)
Total liabilities and stockholders’ equity	$	(c	)

Answer 1

Current ratio = current assets / current Liability

Bank has to maintain current ratio of 1.3. So

1.3= current Asset/50

Current Assets = 50*1.3

Inventory + current asset( othr than inventory) = 65

Inventory=65-32

Inventory = 33

So the bank must have inventory of 33 or more to maintain the current Ratio of 1.3

By using FIFO method cost of inventory will be 2*17 = 34

So. The bank should use FIFO method and inventory cost will be 34 which is more than 33 and fulfull the current Ratio criteria

B

total assets = current asset + non current assets

= (32+34) + 147

= 213

C. Total liability and stockholders equity = total assets = 213

D. Stockholders equity = 213-50-65

= 98