Question

Which of the following is most likely to increase the final number for notes payable for short-term borrowing needs in the pro forma balance sheet?

A. A decrease in inventory.

B. An increase in retained earnings.

C. A decrease in accounts payable.

D. A decrease in accounts receivable.

Answer 1

A decrease in accounts payable is likely to increase short-term notes payable on a pro forma balance sheet as the company may need more short-term borrowing. In financial markets, increased loan supply and demand both result in more loans being taken out, while higher supply causes interest rates to drop.

Step-by-step explanation:

The question pertains to how certain financial statement changes will affect the notes payable for short-term borrowing needs in a pro forma balance sheet. Among the given options, a decrease in accounts payable is most likely to result in an increase in short-term notes payable. When accounts payable decrease, a company has less short-term credit to pay for its liabilities, which may require it to seek additional short-term loans (notes payable) to cover the gap.

Regarding changes in the financial market, an increase in the supply of loans or a rise in demand for loans will both lead to an increase in the quantity of loans made and received. Conversely, a rise in supply will likely cause a decline in interest rates as more capital is available for borrowers.