Question

​(Evaluating liquidity​) Aylward Inc. currently has ​$2,145,000 in current assets and ​$859,000 in current liabilities. The​ company's managers want to increase the​ firm's inventory, which will be financed by a​ short-term note with the bank. What level of inventories can the firm carry without its current ratio falling below 2.1​?

The cost of the additional inventory financed with the​ short-term note is $____? (Round to the nearest dollar)

​

Answer 1

	Answer =1
	Current Ratio = Current Assets / Current Liabilities
		Exuisting
	Current Ratio =
	Current Assets =	$21,45,000
	Divide By	"/"By
	Current Liabilities =	$8,59,000
	Current Ratio =	2.50
	Current Ratio =	2.50
	Company want t maintain the ratio of 2.1 with increase in
	So it means $ 2,145,000 / $ 859,000 = 2.50
	Let x be the amount borrowed, which is used to buy inventory.
	($2,145 000 + x) / ($859 000 + x) = 2.1
	Multiply both sides by the denominator to get rid of the fractions.
	($2 145 000 + x) = 2.1 * ($859 000 + x)
	Expand and simplify
	$2 145 000 + x = 2.1 * $859 000 + 2.1x
	$2 145 000 + x = $1 803 900 + 2.1x
	Move all terms with x to the left and all other terms to the right. Remember to switch signs when you switch sides.
	x - 2.1x = $1 803 900 - $2 145 000
	-1.1x = -$ 341 100	0
	Divide both sides by -1.1
	x = $310,091
	So the maximum that should be borrowed to buy inventory is $310,091
	Answer =	$3,10,091
	Note: Checking the answer with addition of buying of inventory
		Exuisting	Purchase of inventory with Short term Note	Total
	Current Ratio =
	Current Assets =	$21,45,000	$3,10,091	$24,55,091
	Divide By	"/"By
	Current Liabilities =	$8,59,000	$3,10,091	$11,69,091
	Current Ratio =	2.50		2.10
	Current Ratio =	2.50		2.10