Final answer:
American Enterprise's working capital remains the same after taking a short-term note, but the current ratio decreases because total liabilities increase, which reflects a decrease in short-term financial flexibility. Hence, option A is correct.
Step-by-step explanation:
When American Enterprise issues a short-term note for $2,000, its current assets will increase to $14,000 due to the cash received.
However, its current liabilities will also increase to $6,000 because the note is a liability that the company will need to pay back.
The working capital, which is the difference between current assets and liabilities, initially was $8,000 ($12,000 - $4,000) and will remain the same after the transaction ($14,000 - $6,000).
The current ratio, which is a measure of a company's ability to pay its short-term obligations, is calculated by dividing current assets by current liabilities.
Initially, the current ratio would have been 3 ($12,000/$4,000). After taking the short-term note, it would become 2.33 ($14,000/$6,000).
That demonstrates a decrease in the current ratio, reflecting a relative decrease in short-term financial flexibility.
The correct answer to the student's question is therefore A. American Enterprise's total working capital will remain constant while its current ratio will decrease.