question archive The Nelson Company has $1,237,500 in current assets and $495,000 in current liabilities
The Nelson Company has $1,237,500 in current assets and $495,000 in current liabilities
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The Nelson Company has $1,237,500 in current assets and $495,000 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 2.2? Do not round intermediate calculations. Round your answer to the nearest dollar.
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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.
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Since the short-term debt raise is used to increase inventories, both of them will rise by the same amount, say A
Current Ratio = Current Assets / Current Liabilities
2.2 = (1,237,000 + A) / (495,000 + A)
2.2 x (495,000 + A) = (1,237,000 + A)
1,089,000 + 2.2A = 1,237,000 + A
1.2A = 148,000
A = $123,333.33
Quick Ratio = (Current Assets - Inventories) / Current Liabilities = (1,237,000 - 345,000) / (495,000 + 123,333.33) = 1.44
