Chapter 3, Problem 3.15E

Exercise 3.15

LO 6

Effect of transactions on working capital and current ratio Jay Oullette, CEO of Bumper to Bumper, Inc., anticipates that his company's year-end balance sheet will show current assets of $180,000 and current liabilities of $100,000. Mr. Oullette has asked your advice concerning a possible early payment of $20,000 of accounts payable before year-end, even though payment isn’t due until later.

Required:

1. 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 one decimal place.
2. Assume that Bumper to Bumper, Inc., had negotiated a short-term bank loan of $60,000 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 one decimal place.