The statement of financial position (extract) of Kent Pty Ltd as at 30 June 2019 is given below:

Kent Pty Ltd

Statement of Financial Position

As at 30 June 2019

Current Assets

Current Liabilities

Cash

Receivables

Inventories

Prepaid expenses

360000

251 200

540 800

49 600

$1 201 600

Payables

Other liabilities

360000

416000

$776000

The company signed a loan agreement in early 2019 that requires the company to maintain a minimum current ratio of 1.6:1. Management has become concerned that this requirement may not be met and thus plans to conduct one of the following transactions on the last day of the financial year.

Purchase $24000 worth of inventory on credit.

Borrow $50,000 using a long-term bank loan.

Required:

Which of the above transactions would you recommend to the management? Why? Show your workings to support your conclusion.

You may use the following formula for your calculation

CurrentRatio =CurrentAssets /CurrentLiabilities

Quick Ratio = (Cash assets + Receivables)/Current Liabilities

Debt Ratio = Total liabilities/Total assets