Question

Problem 3-9 Current and Quick Ratios The Nelson Company has $1,200,000 in current assets and $500,000 in current liabilities. Its initial inventory level is $350,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 2.0? Round your answer to the nearest cent. $ What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places.

Answer 1

So here Nelson will raise fund as additional notes payable and will use them to increase inventory so it means same proportion will increase in inventory as well as in notes payable and current ratio would be 2

So Lets X Notes payable or Inventory will be increase

So Short tern debt can be increase by $200000 and same can be use for increasing inventory

Quick Ratio after raising the maximum amount of short term fund

I hope this clear your doubt.

Do give Thumbs up if you find this helpful.