Question

Verify why the farmers' credit union chose to increase Farm B's line of credit but not Farm A's in the following scenario:

Farm A has current assets of $150,000 and current liabilities of $125,000. Farm B has current assets of $100,000 and current liabilities of $75,000.

Answer 1

see below

Step-by-step explanation:

he farmers must have considered the ability to repay back loans when making the decision. The ability of a business to meet its current obligations is expressed by the current ratio.

The current ratio or working capital ratio communicates a firm's ability to repay debts as they become due. The higher the ratio, the better.

the current ratio is calculated as current assets/current liabilities

For Firm A,

current ratio =$150,000/ $125,000.

=1.2

For Firm B,

current ratio =$100,000/$75,000

=1.333

Firm B has a better current ratio than Firm A. Firm B is in a better position to repay loans compared to Firm A.