A company has current assets of $100,000, total assets of $250,000, current liabilities of $20,000, and long-term liabilities of $50,000. How much of its existing cash can the company use to acquire equipment without allowing its current ratio to decline below 2.0 to 1?

Question

Quizplus · Accepted Answer

Current ratio = Current assets / Current liabilities

To maintain a current ratio of 2.0 to 1, the company must have at least $2 in current assets for every $1 in current liabilities.

Current assets - amount used to acquire equipment = new current assets
New current ratio = (New current assets) / (Current liabilities)

We know the current ratio is currently 5 to 1 ($100,000 / $20,000). To maintain a ratio of 2 to 1 or higher, the new current assets must be at least:

$20,000 x 2 = $40,000

Therefore, the company can use up to:

$100,000 - $40,000 = $60,000

of its existing cash to acquire equipment without causing its current ratio to decline below 2 to 1. Thus, the correct answer is choice D.

A Company Has Current Assets of $100,000, Total Assets of $250,000