Romeo Productions the Following Information Was Included in a Note to the to the Year

question 60

Multiple Choice

Romeo Productions
The following information was included in a note to the Year 1 financial statements of Romeo Productions:
The company has a loan agreement with First Provincial Bank that states:
1. The current ratio must be 2.0 or higher at all times.
2. The debt-to-equity ratio must not exceed 0.7 at any time.
3. The times interest earned ratio must be 5.0 or higher.
4. The inventory turnover ratio must be 4.0 or higher.

-Refer to the figure Romeo Productions.The company's ratios are: current ratio,2.3; debt-to-equity ratio,0.6; times interest earned ratio,7.1; and inventory turnover ratio,3.7.Based on this information,why was the company in default of its loan agreement?

• A) current ratio
• B) debt-to-equity ratio
• C) times interest earned ratio
• D) inventory turnover ratio

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