Question

The Allen Marble Company has a target current ratio of 2.0 but has experienced some difficulties financing its expanding sales in the past few months. At​ present, the firm has current assets of ​$2.6 million and a current ratio of 2.6. If Allen expands its receivables and inventories using its​ short-term line of​ credit, how much additional​ short-term funding can it borrow before its current ratio standard is​ reached?

Answer 1

Current Ratio = Current Assets / Current Liability

​​​​​​2. 6 = 2,600,000 / X

X = 2,600,000 / 2.6

X = 1,000,000

( X = Current Liability)

Since the Allen marble company has a target current ratio of 2.0 in order to borrow extra money use the same formula.

Target Current Ratio = Current assets / Target Current liabilities

2.0 = 2,600,000 / X

X = $2,600,000 / 2.0

X = $1,300,000

( X = Current Liability)

Allen marbel company can borrow the $1,300,000 - $1,000,000 = $30,000 extra. This amount wil maintain their target current ratio 2.0