A Firm Must Maintain a Minimum Current Ratio of 2

question 16

Multiple Choice

A firm must maintain a minimum current ratio of 2 to 1 in order to be in compliance with one of its bond covenants. Sales are forecast to be $10,000 next year. Historically, current assets
Have averaged 75% of sales. Accounts payable have averaged 20% of sales. Assuming these
Historical ratios will continue, determine the maximum amount of additional short-term debt
Available to the firm next year.

• A)$3,750
• B)$5,500
• C)$13,000
• D)$1,750

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Definitions:

Suppliers

Entities that provide goods or services to other individuals or organizations, typically for resale or business use.

Federal Income Tax

A tax levied by the United States government on the annual earnings of individuals, corporations, trusts, and other legal entities.

Taxpayers

Individuals or entities that are obligated to pay taxes to government authorities based on earned income, property ownership, or other taxable activities.

Percentage

A proportion or share in relation to a whole, represented as a fraction of 100.