Current Ratio Example

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Current Ratio Example
A firmís current assets and current liabilities are 1500 and 600 respectively. How much it can borrow from bank without reducing the current ratio below 1.5?

Current Ratio - reply to mukal India
Alpin McGregor, Member
Current assets are 1500 and current liabilities are 600. Current ratio is therefore 2.5 : 1.
How much can one borrow before the current ratio falls below 1.5 : 1? Answer 1200 so current assets 1500 + 1200 = 2700 and current liabilities 600 + 1200 = 1800 giving current ratio of 1.5 : 1.
This answer assumes that bank borrowing is all repayable within the next 12 months. If bank borrowing is repayable in a time period of more than 12 months then the current ratio will rise with each amount of borrowing. One must remember the assumption that these answers are based on. They assume that all other variables stay constant. This patently is not true.

Current Ratio-reply to Mukal India
Reinhard Otieno, Member
Hi Everyone!
How about this,
If 1500/600 =2.5
Therefore: 1500/(600+x)=1.5
Where x is the amount they can borrow further.

Current Ratio Calculation
Alpin McGregor, Member
@Reinhard Otieno: Reinhard Otieno has omitted the fact that current assets will increase by x amount so equation should be
(1500 + x)/(600+ x) = 1.5. This assumes that borrowing is repayable in 1 year.


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