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

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?