A company has current assets of $100,000, total assets of $250,000, current liabilities of $20,000, and long-term liabilities of $50,000. How much of its existing cash can the company use to acquire equipment without allowing its current ratio to decline below 2 to 1?
A)$ 40,000
B)$150,000
C)$180,000
D)$ 60,000

Question

Quizplus · Accepted Answer

The current ratio is calculated as:
Current Ratio = Current Assets / Current Liabilities

We know that the current ratio should not fall below 2:1. Let's use x to represent the amount of cash the company can use to acquire equipment without the ratio falling below 2:1.

So, we can write an equation as follows:

(Current Assets - x) / Current Liabilities = 2

Substituting the given values, we get:

(100,000 - x) / 20,000 = 2

Solving for x, we get:

x = 60,000

Therefore, the company can use up to $60,000 in cash to acquire equipment without allowing its current ratio to decline below 2 to 1. Hence, option D is the correct answer.

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