Question

A corporate loan applicant has cash of $40, receivables of $50, and inventory of $20. The applicant also has current debts of $65. If the bank's policy requires a current ratio of 1.75 or better and an acid test ratio of 1.25 or better would the applicant receive the loan?

A. Yes, because the applicant's current ratio and acid test ratios are acceptable.
B. No, because the applicant's current ratio and acid test ratios are both unacceptable.
C. No, because although the applicant's current ratio is acceptable, its acid test ratio is not.
D. No, because although the applicant's acid test ratio is acceptable, its current ratio is not.

Answer 1

B. No, because the applicant's current ratio and acid test ratios are both unacceptable.

Step-by-step explanation:

The formulas for the ratio are as follows,

Current ratio = Current assets / Current Liabilities

Acid Test = Current assets - Inventory / Current Liabilities

For the applicant, we have the following ratio

Current Ratio = (40 + 50 + 20) / 65 = 1.69

Acid Test = (40+50-20)/65 = 1.077

As per the banks requirements, the applicant does not qualify for the loan due to both ratios being unacceptable.

Hope that helps.