Current and Quick Ratios The Nelson Company has $1,957,500 in current assets and

Question

Current and Quick Ratios The Nelson Company has $1,957,500 in current assets and $675,000 in current liabilities. Its initial inventory level is $472,500, 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 2.5? Round your answer to the nearest cent. $

What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places.

Explanation / Answer

Current ratio = Current assets/Current liabilities

2.50 = ($1,957,500+X)/($675,000+X)

$1,687,500+2.50×X = $1,957,500+X

1.50×X = $270,000

X = $180,000

Hence, notes payable can increase by $180,000.

Quick ratio = Quick assets/Current liabilities

= ($1,957,500-$472,500)/($675,000+$180,000)

= $1,485,000/$855,000

= 1.74

Hence, quick ratio is 1.74

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