The current ratio of any business organization is the ratio of its current assets to its current liabilities. Let's say you are acting as the Managing Director of ACE Equipment Co. and have decided to obtain a short-term loan to build up inventory. The company has current assets of N350,000 and current liabilities of N80,000. How much can the Managing Director borrow if the company's current ratio must be not less than 2.5? Note that funds received are considered current assets and loans are considered current liabilities.
Added by Domingo I.
Step 1
The current ratio is calculated as current assets divided by current liabilities. So, the current ratio of ACE Equipment Co. is N350,000 / N80,000 = 4.375. The Managing Director wants to maintain a current ratio of not less than 2.5. This means that the current Show more…
Show all steps
Your feedback will help us improve your experience
Akash M and 73 other Principles of Accounting educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
a. The current ratio (assets/liabilities) of company X is 3.2. Given that the current assets are $416,000, find the current liabilities: b. The board of directors determines that the current ratio must never be below 2.6. What is the maximum amount that the company can borrow?
Keondre P.
Current ratio and quick ratio of a company are 3:1 and 2:1 respectively. Current liability is $30000. what is the value of the inventory?
Narayan H.
A company has $1,500,000 in current assets and $500,000 in current liabilities. The company's current inventory level is $250,000, and it plans to issue short-term debt to increase inventory. What is the largest amount of short-term debt the company may issue to increase inventory without dropping the current ratio below 2.0
T. L.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
Transcript
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD