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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Definitions:

Direct Materials

Raw materials that can be directly linked to the production of specific goods or services in a manufacturing process.

Fluid Ounces

A unit of volume used primarily in the United States to measure liquids, equivalent to approximately 29.57 ml.

Production Process

The series of steps involved in transforming raw materials into finished goods or services.

Overhead Account

An account used to record the indirect costs of a business, which are not directly attributable to a specific product or service.