Buffalo Company has current assets, current liabilities, and long-term liabilities of $10,500, $3,000, and $4,000, respectively at the end of 2017. How much cash can Buffalo use to acquire equipment and retain a current ratio of at least 2.0?
A)$1,000
B)$4,500
C)$4,000
D)$6,000

Question

Quizplus · Accepted Answer

To maintain a current ratio of at least 2.0, the current assets should be at least twice the amount of current liabilities. Therefore, the minimum amount of current assets Buffalo should have is $6,000 ($3,000 x 2). 
To determine how much cash Buffalo can use to acquire equipment and still maintain a current ratio of at least 2.0, we subtract the minimum required current assets from the total current assets: $10,500 - $6,000 = $4,500.
Therefore, Buffalo can use $4,500 cash to acquire equipment and still maintain a current ratio of at least 2.0. 
The answer is B.

Buffalo Company Has Current Assets, Current Liabilities, and Long-Term Liabilities