Redfearn Company has current assets of $150,000 and current liabilities of $60,000.How much inventory could it purchase on account and achieve its minimum desired current ratio of 2 to 1?
A) $10,000
B) $20,000
C) $30,000
D) $40,000

Question

Quizplus · Accepted Answer

To achieve a minimum desired current ratio of 2 to 1, Redfearn Company needs to have current assets that are at least twice its current liabilities. Currently, its current assets are 150,000 and its current liabilities are 60,000, so its current ratio is 2.5 (150,000/60,000).

If the company were to purchase inventory on account, its current assets would increase and its current ratio would decrease. The question is asking how much inventory the company could purchase on account and still maintain a minimum current ratio of 2 to 1.

To find out, we can set up the following equation:

Current ratio = Current assets / Current liabilities

2 = (150,000 + Inventory) / 60,000

Multiplying both sides by 60,000, we get:

120,000 = 150,000 + Inventory

Subtracting 150,000 from both sides, we get:

Inventory = 30,000

Therefore, the company could purchase $30,000 of inventory on account and still maintain a minimum current ratio of 2 to 1.

So the best choice is C.

Redfearn Company Has Current Assets of $150,000 and Current Liabilities