Question

Your current bank loan agreement requires a current ratio of 2 to 1. Which of the following financial statements would the bank review on a periodic basis to ensure that the hotel was in compliance with terms of the loan?

1) income statement
2) balance sheet
3) statement of retained earnings
4) statement of cash flows

Answer 1

The bank would review the balance sheet to check compliance with the current ratio requirement of 2 to 1, as it details the company's current assets and liabilities necessary for this calculation. Therefore, the correct option is 2.

Step-by-step explanation:

The financial statement that the bank would review to ensure the hotel is in compliance with a current ratio requirement of 2 to 1 is the balance sheet. The balance sheet provides a snapshot of a company's financial position at a given point in time and includes information on the company's assets, liabilities, and shareholder equity. The current ratio is calculated by dividing current assets by current liabilities; these figures are found on the balance sheet. Therefore, the bank would periodically check the balance sheet to verify that the current assets are at least twice the current liabilities. Items like income statement, statement of retained earnings, and statement of cash flows provide valuable insights into the company's financial operations, profitability, and cash management, but they do not provide the direct information required to calculate the current ratio as the balance sheet does.