Scrubber, Inc

question 162

Multiple Choice

Scrubber, Inc. presented the following information in a note to its financial statements for the year ending December 31, 2017:

The company has a loan agreement with Mountain State Bank that states:

1. The current ratio should remain at least 2.0 to 1 at all times.
2. The debt-to-equity ratio should not exceed 0.7 to 1 at any time.
3. The company must maintain $75,000 cash at all times.

The ratios at year-end are current ratio, 2.3 to 1 and debt-to-equity ratio, 0.2 to 1. The amount of cash on the bank statement is $75,400, but the Cash account after the adjustments from the bank reconciliation has a balance of $74,900. Has Scrubber violated its loan agreement?

• A)No
• B)Yes,the cash balance is less than $75,000.
• C)Yes,the current ratio is 0.3 or 30% larger than the agreement indicates.
• D)Yes,the cash balance is less than $75,000,and the debt-to-equity ratio is overstated.

Recognize the importance and process of bank reconciliation in safeguarding cash.

Understand the concept of Cash Short and Over and its treatment in financial statements.

Identify and understand the importance of the control environment within an organization.

Understand the process and significance of bank reconciliation in financial accounting.

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Definitions:

Organizational Variables

Factors or characteristics within an organization that can influence its operations, culture, and outcomes.

HR Policy

A set of formal guidelines and procedures drafted by an organization to manage its workforce effectively, covering aspects like recruitment, training, and benefits.

Specialist Workers

Employees who possess expert knowledge or skills in a specific field or area of professional practice.

Designated Group Members

Individuals identified as belonging to specific categories (e.g., based on ethnicity, gender, disability) for affirmative action or diversity goals.