Question 4.

Davalos Inc. is preparing its 2022 financial statements and is concerned about violating the debt covenant on a large loan. The debt covenant requires Davalos to maintain a current ratio of 2.2:1. At December 15, 2022, Davalos currently has a current ratio of 2.0:1.

Davalos is considering various options to make the problem disappear. Show what impact each of the following would have on the current ratio, and whether it could achieve the goal. (You can always make up fake numbers as a way to test your supposition.)

a)Pay some current liabilities off.

b)Buy more inventory with cash.

c)Sell off some short-term marketable securities.

d)Borrow cash on a 2-year note.

e)Try to sell lots more merchandise at yearend by offering steep discounts.

f)Sell unused equipment, if possible.