Loan/Assets Question

[Trish]

Hello Group,

I have a student question regarding the following criteria for XYZ company:

As of September 30, 2013 the draft XYZ financial statements show total assets of $500,000, 35% of which are current assets, including cash and cash equivalents (including short term secure investments).

Am I to infer from this criteria that if the bank told XYZ company "we will provide you with a continuous operating line of credit to XYZ based on 60% of total current assets", that if the financial statements read 50% of total assets are current that XYZ has not met the criteria for the operating line of credit?

The bank seems a little ambiguous in its statement and I want to know if the bank means that XYZ must present at least 60% of total assets that should be current in which case this hasn't been met by year's end. Any help is appreciated.

 

[kirby]

How I read that is the bank is saying it will extend credit to xyz based on 60 percent of xyz's current assets. The amount of the total LOC is unspecified. Example : xyz has current assets of $100 MM. The line is based on 60% of that. Then maybe the actual line is limited to 50% of that 60%. We don't know...

 

[bklynboy]

Agree with Kirby. I also view it as the bank will extend credit to a maximum limit of 60% of current assets. So if current assets is 50M - then your LOC is 60% of 50M or 30M.

 

[Trish]

Thank guys....I was also thinking along the same lines and your opinions really helped!

~Trish