Question

(Related to Checkpoint 4.1) (Liquidity analysis) Airspot Motors, Inc. has $2,419,200 in current assets and $864,000 in current liabilities. The company's managers want to increase the firm's inventory, which will be financed using short-term debt. How much can the firm increase its inventory without its current ratio falling below 2.2 (assuming all other current assets and current liabilities remain constant)? Airspot Motors, Inc. could add up to $ in inventories. (Round to the nearest dollar.)

Answer 1

Current Assets = $2419200

Current Liabilities = $864000

Current Ratio = Current Assets / Current Liabilities

Let the inventories be increased by x

Hence, Current Liabilities = 864000+x

We need the current ratio to be more than 2.2

Hence, 2.2 = 2419200/(864000+x)

=> x = 2419200/2.2 - 864000 = 235636

Hence, Airspot Motors can add upto $235,636 in inventories