Management of Rivers Co. anticipates that its year-end balance sheet will show c

Question

Management of Rivers Co. anticipates that its year-end balance sheet will show current assets of $12,828 and current liabilities of $7,500. Management is considering paying $3,770 of accounts payable before year-end even though payment isn't due until later.

Calculate the firm's working capital and current ratio under each situation.

Do Not Prepay Prepay
Accounts Payable Accounts Payable
Working capital $ $
Current ratio

a. Assume that Rivers Co. had negotiated a short-term bank loan of $7,000 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.

Without Loan With Loan
Working capital $ $

Explanation / Answer

firm's working capital and current ratio if they don't pay accounts payable or without the loan will be as follows WC= 12,828-7,500= $5328 CR= 12,828/7,500=1.7104 IF Management is considering paying $3,770 of accounts payable CL will be 7500-3770= $3730 WC= 12828-3730=$9098 CR= 12828/3730= 3.44 IF short term Loan is taken CL= 7500+7000=$14500 WC= 12828-14500= $-1672 CR= 12828/14500= .8847

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