Oreo Company has current assets of $20,000,current liabilities of $8,000,and long-term liabilities of $3,000.Oreo wants to buy new equipment.How much of its existing cash can Oreo use to acquire equipment without allowing its current ratio to decline below 2.0 to 1?
A)$4,000
B)$8,000
C)$10,000
D)$12,000

Question

Quizplus · Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Initially, Oreo's current ratio is $20,000 / $8,000 = 2.5. To maintain a current ratio of at least 2.0, after spending X dollars on equipment, the new current assets would be $20,000 - X, and the equation would be ($20,000 - X) / $8,000 ≥ 2. Solving for X gives X ≤ $4,000.

Oreo Company Has Current Assets of $20,000,current Liabilities of $8,000,and