A firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

Question

Quizplus · Accepted Answer

Since the short-term loans for construction are scheduled to be converted to long-term debt (first mortgage bonds) when the plant is completed, it is appropriate to separate the construction loan from current liabilities associated with working capital when calculating net working capital. This is because the construction loan will not be due within the next year, unlike other current liabilities associated with working capital such as accounts payable and accrued expenses. Separating the construction loan will help provide a more accurate picture of the company's liquidity and working capital position.

A Firm Constructing a New Manufacturing Plant and Financing It