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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 Summary

Short term loans expected to be refinanced are examined.

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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 ...

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