Question

Current and Quick Ratios The Nelson Company has $1,260,000 in current assets and $450,000 in current liabilities. Its initial inventory level is $225,000, and it will raise funds as additional notes payable and use them to increase inventory.

1.How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 2.1? Round your answer to the nearest cent. $

2.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.

Answer 1

Any Current assas = Current liability - 1260000 450000 Current Retio = Current assets Current liability 1260000 450000 = 2.8 Cluick Ratio = current essels Inventory Current liability 1260000 - 225000 450000 = 2.3 Raising fund through notes payable will increase the carrent tialility & liability & this Note payable fund will be used four purchasing inventory which will increase the current asset we have with out to find How much can Nelson short term debt increase pushing Current Ratio below 2.1 so current Ratio = current asset a current liability 2.1 = 1260000 + Inventorry 450000 + Notes payable Inventory - Notes payable = x 2.1 = 1260000 + x 450000 + x since

2.1 (450000+)) = 1200000 +X 945000 + 2) = 1200000 +X +315000 = 71.12 2 = 286363.636 Notes payable = 286363. 64 Notes payable ~ 286364 Quick Ratio after Raising fund. Quick Ratio = Current assets - Inventory Current liability New Inventory = 225000 + 286363.64 511363,64 New Current liability = previous current & Notes Payable (bund Raised) = 450000 + 286363.64 = E6 736363.64 liability Quick Ratio = 1260000 - 51136364 736363.64 = = 1.0166 1:02