Problem: Pierre Imports' balance sheet is shown below. The company has credit terms from its suppliers of net 30. However, the company has fallen behind and currently payables represent 50 days purchases. The company wants to increase bank borrowings in order to become current in meeting its trade obligations (that is, to have 30 days' payables outstanding).
| Balance Sheet (in thousands) |
| Cash |
200 |
|
Accounts payable |
1200 |
| Accounts receivable |
600 |
|
Bank loans |
1400 |
| Inventory |
2,800 |
|
Accruals |
400 |
| Current assets |
3,600 |
|
Current liabilities |
3,000 |
| Land and buildings |
1,200 |
|
Mortgage on real estate |
1,400 |
| Equipment |
800 |
|
Common stock, $0.10 par |
700 |
|
|
|
Retained earnings |
500 |
| Total assets |
5,600 |
|
Total liabilities and equity |
5,600 |
Question 1: How much bank financing is needed to eliminate the past-due accounts payable?
Question 2: Calculate the company's debt ratio, current ratio, and quick ratio.
Question 3: Is the bank likely to make the loan? Why or why not?