Use this information to answer the following questions:
Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200,000. It borrows $75,000 from a finance company, repayable in 5 years.
-What is the effect of the loan on working capital?
A) There is no effect.
B) There is an increase of $75 000.
C) There is a decrease of $75 000.
D) It cannot be determined from the above information.

Question

Use this information to answer the following questions:
Hard-up Ltd has a current ratio of 0.75. Its current liabilities amount to $200,000. It borrows $75,000 from a finance company, repayable in 5 years. 
-What is the effect of the loan on working capital?
A) There is no effect.
B) There is an increase of $75 000.
C) There is a decrease of $75 000.
D) It cannot be determined from the above information.

Quizplus · Accepted Answer

The loan increases current assets (cash) by $75,000 without affecting current liabilities, thus increasing working capital by $75,000.

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