Question

Current and Quick Ratios

The Nelson Company has $1,410,000 in current assets and $470,000 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. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.8? Do not round intermediate calculations. Round your answer to the nearest dollar.

$   

What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Let notes payable be increased by x,

So,

1.80 = (1,410,000 + x)/(470,000 + x)

846,000 + 1.80x = 1,410,000 + x

x = $705,000

So,

notes payable is increased by $705,000

Quick Ratio = (1,410,000 - 345,000)/(470,000 + 705,000)

Quick Ratio = 0.906