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.

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Definitions:

Probability Mass Function

A mathematical operation that determines the likelihood that a specific discrete random variable matches a particular value exactly.

Outcome

The result or final consequence of a sequence of actions or events.

Incremental Costs

Incremental costs are the additional costs that are incurred from producing an additional unit of product or making a decision.

Incremental Revenue

The increase in income resulting from a specific business decision, distinct from the company's base revenue level.