If a Company Converts a Short-Termnote Payable into a Long-Term

question 188

Multiple Choice

If a company converts a short-termnote payable into a long-term note payable,what would be the effect of this transaction?

• A) A decrease in working capital and an increase in the current ratio.
• B) A decrease in both working capital and the current ratio.
• C) A decrease in both the current ratio and the acid-test ratio.
• D) An increase in both working capital and the current ratio.

---

Definitions:

Tax Shield Approach

A financial strategy that utilizes deductible expenses, like interest, to reduce a company's taxable income, thereby lowering its tax liability.

Operating Cash Flow

The cash generated from a company's normal business operations, indicating its ability to generate positive cash flow.

CCA Class

A classification system used in Canadian tax law for capital cost allowance, determining the depreciation rate for tax purposes of tangible capital assets.

Marginal Tax Rate

The rate at which an additional dollar of income would be taxed, reflecting the rate applied to the last dollar earned.