Question

The Nelson Company has $1,313,000 in current assets and $505,000 in current liabilities. Its initial inventory level is $335,000, 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. $ 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 the amount of inventory purchase financed with short term notes payable be "X"

Current ratio= current asset /current liabilities

2.2 = [1313000+X] /[505000+X]

2.2 (505000+X ) = 1313000+X

   1111000+2.2X = 1313000+ X

    2.2X -X = 1313000-1111000

      1.2X = 202000

         X= 202000/1.2

          = 168333.33    (rounded to 168333)

Nelson's short-term debt (notes payable) increase without pushing its current ratio below 2.2 = $ 168333

2)

Total current asset after purchase of additional inventory = 1313000+168333=1481333

Total current liability = 505000+168333= 673333

quick ratio = [current asset- inventory ]/current liability

              =[1481333-168333]/673333

               = 1313000/673333

               = 1.95: 1