Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 42

Critical Thinking: Evaluating Effects on the Quick Ratio
Assume you work as an assistant to the chief financial officer (CFO) of Fashions First, Inc. The CFO reminds you that the fiscal year-end is only two weeks away and that he is looking to you to ensure the company stays in compliance with its loan covenant to maintain a quick ratio of 1.25 or higher. A review of the general ledger indicates that cash and other liquid assets total $690,000 and current liability are $570,000. Your company has an excess of Cash ($300,000) and an equally large balance in Accounts Payable ($270,000), although none of its Accounts Payable are due until next month.
Required:
1. Determine whether the company is currently in compliance with its loan covenant.
2. Assuming the level of assets and liabilities remains unchanged until the last day of the fiscal year, evaluate whether Fashions First should pay down $90,000 of its Accounts Payable on the last day of the year, before the Accounts Payable become due.