The following excerpt was taken from a recent financial report of Cummins Engine Company, a manufacturer of heavy-duty truck engines. Loan agreements contain covenants which impose restrictions on the payment ofdividends and distributions ofstock, require maintenance of a 1.25:1 current ratio, and limit the amount of future borrowings. Under the most restrictive covenants, retained earnings of approximately $351 million were available for payment ofdividends. REQUIRED:

a. Briefly explain the meaning of the above excerpt.

b. Why would a bank or other creditor impose such restrictions on a borrowing company?

c. Explain the role of financial accounting numbers in the restrictions described above.