The following information was included in a note to the current year financial statements of Romeo Productions: The company has a loan agreement with First National Bank that states:
1)The current ratio must be 2.0 or higher at all times.
2)The debt-to-equity ratio must not exceed 0.7 at any time.
3)The times interest earned ratio must be 5.0 or higher.
4)The inventory turnover ratio must be 4.0 or higher.
The company's ratios are: current ratio, 2.3; debt-to-equity ratio, 0.6; times interest earned ratio, 7.1; and inventory turnover ratio, 3.7. Based on this information, the company was in default of its loan agreement because of the
A)current ratio.
B)debt-to-equity ratio.
C)times interest earned ratio.
D)inventory turnover ratio.

Question

Quizplus · Accepted Answer

According to the loan agreement, the inventory turnover ratio must be 4.0 or higher. However, the company's inventory turnover ratio is only 3.7, indicating that they are not meeting this requirement and are therefore in default of their loan agreement. The company is not in default of any of the other ratios listed in the loan agreement.

The Following Information Was Included in a Note to the Current