Calculation of Maximum Borrowing Limit:


To calculate the maximum borrowing limit, we need to first determine the current ratio of the firm. The current ratio is calculated as follows:

Current Ratio = Current Assets / Current Liabilities

Therefore, the current ratio of the firm is:

Current Ratio = 200000 / 100000 = 2

As the current ratio of the firm is 2, it means that for every rupee of current liabilities, the firm has two rupees of current assets. To maintain the current ratio at 1.5, the firm cannot allow the current assets to fall below 1.5 times the current liabilities. Therefore, the minimum amount of current assets required to maintain the current ratio of 1.5 is:

Minimum Current Assets = Current Liabilities x 1.5

Minimum Current Assets = 100000 x 1.5 = 150000

This means that the firm must maintain a minimum of rupees 150000 of current assets to maintain the current ratio at 1.5. As the firm already has rupees 200000 of current assets, it can borrow an additional amount without reducing the current ratio below 1.5.

Maximum Borrowing Limit = Current Assets - Minimum Current Assets

Maximum Borrowing Limit = 200000 - 150000 = 50000

Therefore, the firm can borrow up to rupees 50000 from the bank without reducing the current ratio below 1.5.

Explanation:


The current ratio is an important liquidity ratio that measures the ability of a firm to meet its short-term obligations. A current ratio of 1.5 means that a firm has 1.5 times more current assets than current liabilities. If a firm's current ratio falls below 1.5, it means that the firm may not be able to meet its short-term obligations. Therefore, the firm needs to maintain a current ratio of at least 1.5 to ensure its financial stability.

In this case, the firm's current ratio is 2, which means that the firm has excess current assets compared to its current liabilities. This excess provides a cushion for the firm to borrow more funds without affecting its current ratio. The maximum borrowing limit is calculated by subtracting the minimum current assets required to maintain a current ratio of 1.5 from the current assets. This calculation ensures that the firm maintains its financial stability while also being able to borrow funds for its business operations.

Therefore, by calculating the maximum borrowing limit, the firm can ensure that it maintains a healthy current ratio while also having access to the necessary funds for its business operations.

Statement Gives :
Current Assets = 2,00,000
Current Liabilities = 1,00,000
Next Step,
Now, Let the borrowed Amount be X,

1.5 = 2,00,000 + X / 1,00,000 + X
1.5(1,00,000 + X) = 2,00,000 + X
After Multiplication,
1,50,000 + 1,5X = 2,00,000 + X
1.5X - X = 2,00,000 - 1,50,000
0.5X = 50,000
X = 50,000 × 0.5
X = 1,00,000

So the organisation or firm may borrowed ₹1,00, 000
And its Ratio still be 1.5