Effect of transactions on working capital and current ratio Management of Rivers Co. anticipates that its year-end balance sheet will show current assets of $12,639 and current liabilities of $7,480. Management is considering paying $3,850 of accounts payable before year-end even though payment isn’t due until later.
Required:
a.Calculate the firm’s working capital and current ratio under each situation. Would you recommend early payment of the accounts payable? Why? Round your current ratio answer to two decimal places.
b. Assume that Rivers Co. had negotiated a short-term bank loan of $5,000 that can be drawn down either before or after the end of the year. Calculate working capital and the current ratio at year-end under each situation, assuming that early payment of accounts payable is not made. When would you recommend that the loan be taken? Why? Round your current ratio answer to two decimal places.
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