Question

-of-Chapter Problems -Analysis of Financial Statements Check My Work (I remaining) eBook Problem Walk-Through Current and Quick Ratios The Nelson Company has $1,287,000 in current assets and $495,000 in current liabilities. Its inital Inventory level is $320,000, 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) I not round intermediate calculations. Round your answer to the nearest dollar. ncrease without pushing its current ratio below 2.27 Do What will be the firm's quick ratio after Nelson has raised the maximum amount of two decimal places. short-term funds? Do not round intermediate calculations. Round your answer to

Answer 1

Current Ratio = Current Assets/Current liabilities

Existing Current Ratio:

= $1,287,000/$495,000 = 2.6

Now if the Nelson company plans for raising Inventories. it would have to borrow funds (hence raise liabilities) and also the Current Ratio doesn't go below 2.2:

=> $1,287,000/CL=2.2
=> CL=$1,287,000/2.2 = $585,000

Hence, Nelson can raise up to $585,000 so that its Current Ration doesn't fall below 2.2