Question

Current and Quick Ratios The Nelson Company has $1,440,000 in current assets and $480,000 in current liabilities. Its initial inventory level is $315,000, 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 2.2? Do not round intermediate calculations. Round your answer to the nearest dollar. $ 96,000 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

Solution:-

Present Current Ratio =

Present Current Ratio =

Present Current Ratio = 3

Minimum Current Ratio =

14,40,000 + x = 2.20(4,80,000 + x)

14,40,000 + x = 10,56,000 + 2.20x

3,84,000 = 1.20x

x =

x = 3,20,000

Short Term debt can increase by a maximum of $3,20,000 without violating a 2.20 to 1 current ratio. In the Question given,  it will raise funds as additional notes payable and use them to increase inventory. So Inventory will increase to $6,35,000 and then current Assets Increases to $17,60,000.

Quick ratio =

Quick ratio =

Quick ratio = 1.41 Times.

The firm's quick ratio after Nelson has raised the maximum amount of short-term funds is 1.41 Times.

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