Question

Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of high-impact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors. Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payable-providing that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements. Russ would like to apply for a $130,000 six-month loan bearing an interest rate of 8% per year. The unaudited financial reports of the company appear below:

Answer 1

ca) Current Ratio= Current Assets Current Liabilities as 537.9. 306. 2 1.76 Acid Test Ratioe Current Assets - Inventory 1 Current Liabilities - $37.9-250 306 287.9 306 0.94 enterest on Net operating Income to Proposed loan EBIT Interest Expensen

Penterent Expense on proposed loan. 3 $130,00p x8 x Тор 2 $4$5,200 Net operating Income $27,000 2 $27,000 $5200 S.Lg 2 - Current Ratio Acid Test Ratio Time Interest Ratio This year 1:76 og 5.19 Required for Loon 2 I 4 Condition Satisfied No No Ye Hence, the company's this year statement does not satisfy and two of the three conditions for the allocation of loan. So, loan cannot be allocated to the company

306 200). If the old machinery š considered as inventary Current Rautio. @ $537.9 + $82 E 2023 K90 (stered for a Acid Test Ratio = 537.9 - (250 +82) 306 242.9 306 - 0.79

Time enterent banned Ration $27000 $5200 z solg Year Current Ratio Acid Test Ratio Time Interest Ratio This 2.02 0.79 5.19 required 2 I 4 satisfied leto No Yes Thus, loan can be allocated to the company 246) If the dd machinery is sold off o Current Assets Clash on Debtoy) would increase Current Ration $537.9+882 $306 2.02 = Acid Test Ration (8537.9+882) - $250 $306 2 3 69.9 306 21.21

Time Interest Ratioz $27,000 $5.200 a This Year sig Required 2 I Sentisfied Yes Yes Current Ratio Acd Text Ratio Time Penterent Ratio 1.2 S.19 9 Yes allocated to Now loan can be the company.