( Evaluating liquidity ) The Allen Marble Company has a target current ratio of

Question

(Evaluating liquidity)

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 $2.7 million and a current ratio of 2.7 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?

The addition to current assets is ?

(Round to the nearest dollar.)

Explanation / Answer

HI

Current asset formula = current asset/current liabilities

2.7= 2.7/current liabilities

current liabilities =1 M

so at this time current liablities =1 M

and target current ratio =2

so for that Allen will take additional short term debt or current liablities.

lets say current asset will be same =2.7M

and target current ratio =2

so 2= 2.7/target current liablities

target current liabilite =2.7/2 = 1.35M

Hence firm will borrow 1.35-1 = 0.35 M extra borrowings to reach the target of 2 of current ratio  

Thanks

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