Question

Current and Quick Ratios The Nelson Company has $1,150,000 in current assets and $575,000 in current liabilities. Its initial inventory level is $345,000, and it will raise funds as additional notes payable and use them to increase inventory.

1. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.6? Round your answer to the nearest cent.

2.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

Current and Quick Ratios The Nelson Company has $1,150,000 in current assets and $575,000 in current liabilities. Its initial inventory level is $345,000, and it will raise funds as additional notes payable and use them to increase inventory.

1. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.6? Round your answer to the nearest cent.

2.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.

Your answer

Current Asset = 1,150,000

Curent Liabilities = 575,000

Inventory Level = 345,000

Let the Notes Payables raised be X

Current Liabilities will become 575,000 + X

Inventories will become = 345,000 + X

Current Assets will be 1,150,000 + X

Answer 1)

Maintaining the Current Ratio at 1.6

920,000 + 1.6 X = 1,150,000 + X

1.6 X - X = 1150000 - 920000

X = 230000/ 0.6

X = 383,333.33

$ 383,333.33 cab be raised as notes payables to maintain a current ratio of 1.6

Answer 2)

Quick Ratio = 0.84

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