The Nelson Company has $1,750,000 in current assets and $700,000 in current liab

Question

The Nelson Company has $1,750,000 in current assets and $700,000 in current liabilities. Its initial inventory level is $420,000, 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 2.0? 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

Ans) Current assets = $1,750,000

Current liabilities = $700,000

Current ratio = Currents asssts/ Current liabilities = 2:1

Lets X be the amount they can add to inventory and notes payable , then

1,750,000 + X / 700,000 + X = 2 / 1

1,750,000 + X = 1,400,000 + 2X

X = $350,000

Revised Current assets = 1,750,000 + 350,000 = $2,100,000

Revised Current liabilities = 700,000 + 350,000 = $1,050,000

Quick ratio = Current assets - inventory - prepaid expenses / Current liabilities

= 2,100,000 - 350,000 / 1,050,000

= 1,750,000 / 1,050,000 = 1.67   

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