The ABC Company Has Current Assets of $10,000 and Current

question 155

Essay

The ABC Company has current assets of $10,000 and current liabilities of $8,000. They are concerned about their current ratio and are considering paying liabilities totaling $3,000. The ABC Company has a loan with First Bank which requires them to maintain a minimum current ratio of 1.4.
Required:
1. What is the formula for the current ratio?
2. Compute the current ratio before the possible payment of the liabilities of $3,000.
3. Compute the current ratio assuming that ABC Company pays the $3,000 in current liabilities.
4. What are some possible consequences if ABC's current ratio falls below the required 1.4?

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Definitions:

Developmental Reading Disorder

Also known as dyslexia, a learning disorder characterized by difficulty reading due to problems identifying speech sounds and learning how they relate to letters and words.

Dyscalculia

A specific learning disability affecting a person's ability to understand numbers and learn math facts.

Piaget

A Swiss psychologist known for his pioneering work in child development, focusing on cognitive growth and the stages of development.

Formal Operational

The final stage of Jean Piaget's theory of cognitive development, characterized by the ability to think abstractly, logically, and systematically.