Your company wants to prequalify for larger projects. A potential client requests financial statements showing a 2:1 current ratio. If your current assets are $450,000, what minimum current liabilities amount would meet this requirement?
Correct Answer
A) $225,000
Current ratio = Current Assets ÷ Current Liabilities. For a 2:1 ratio: $450,000 ÷ Current Liabilities = 2. Therefore, Current Liabilities = $450,000 ÷ 2 = $225,000 maximum to maintain the required ratio.
Why This Is the Correct Answer
The current ratio formula is Current Assets ÷ Current Liabilities = Ratio. To find the maximum current liabilities that maintains a 2:1 ratio, we rearrange the formula: Current Liabilities = Current Assets ÷ Desired Ratio. With $450,000 in current assets and a required 2:1 ratio, the maximum current liabilities is $450,000 ÷ 2 = $225,000. Any amount higher than $225,000 would result in a ratio below 2:1, failing to meet the prequalification requirement.
Why the Other Options Are Wrong
Option C: $300,000
$900,000 would create a ratio of 0.5:1 ($450,000 ÷ $900,000 = 0.5), which is far below the required 2:1 minimum ratio
Option D: $150,000
$150,000 would create a ratio of 3:1 ($450,000 ÷ $150,000 = 3), which exceeds the minimum 2:1 requirement but is not the maximum allowable amount
Memory Technique
Think 'DIVIDE to SURVIVE' - divide current assets by the ratio number to find the maximum current liabilities that keeps you qualified for the project
Reference Hint
Business and Finance chapter, specifically sections on financial ratios and contractor prequalification requirements
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