Answer:
The additional short-term funding that can be borrowed is 500,000
Explanation:
First the amount of current liabilities must be known:
Current Ratio = Current Asset / Current Liabilities
2.5 = 2,500,000 / X
X = 2,500,000 / 2.5
X= 1,000,000
To know how much to expand receivables and inventories in the formula of the current ratio, to the amount of current assets and current liabilities must add an amount such that the result is 2.0.
(2,500,000 + x) / (1,000,000 + x) = 2.0
(2,500,000 + x) = 2.0 * (1,000,000 + x)
2,500,000 + x = (2.0* 1,000,000) + (2.0 x)
2,500,000 + x = 2,000,000 + 2.0 x
2,500,000 - 2,000,000 = 2.0 x – x
500,000 = x
So the maximum that should be expand inventory and receivables is $500,000.
