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    Short term loans expected to be refinanced

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    The following information comes from the financial statements of Randall Stewart company:
    current assets 80,000
    accounts payable 55,000
    short term payable 65,000
    long term debt 110,000
    other long term liabilities 10000
    total stockholders equity 180000

    Randall has arranged with its bank t refinance its short term loan when it becomes due in three months. The new loan will have a term of five years.

    Compute the following ratio value

    current ratio
    debt to equity ratio
    debt ratio

    So, my question is due I include the short term payable as current or not?

    If you were the auditor of Randall Stewart's financial statements, how would you convince yourself of the validity of the refinancing agreement?

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    Solution Preview

    The current short term financing is 65,000. This current debt is going to be refinanced into a long term payable. This is going to improve the current ratio, leave the debt to equity ratio unchanged, and the debt ratio unchanged. Randall is in a better position after the refinancing, as they have freed up cash flow, which means they can better adapt to a short term fluctuation in sales.

    Randall has more flexibility after the refinance of the current debt. They still have the option to pay off their long term debt, if that is in the best interests of Randall, but they are not obligated ...

    Solution Summary

    Short term loans expected to be refinanced are examined.