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) $30,000
B) $40,000
C) $10,000
D) $20,000

Question

Quizplus · Accepted Answer

Current assets = $150,000Current liabilities = $60,000Desired current ratio = 2:1To achieve a current ratio of 2:1, current assets must be twice the current liabilities.Therefore, current assets = 2 * current liabilities= 2 * $60,000= $120,000Inventory that can be purchased on account = Current assets - Current liabilities= $150,000 - $60,000= $90,000However, the company already has $150,000 in current assets. Therefore, the maximum amount of inventory that can be purchased on account is:$90,000 - $150,000= -$60,000This means that the company cannot purchase any inventory on account and still achieve its desired current ratio.

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