Question

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The Stewart Company has $822,000 in current assets and $320,580 in current liabilities. Its initial inventory level is $189,060, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? Round your answer to the nearest dollar. $

Answer 1

Current ratio = ($822,000 + ∆NP) / ($320,580 + ∆NP) = 2

($822,000 + ∆NP) = 2($320,580 + ∆NP)

$822,000 + ∆NP = $641,160 + 2∆NP

$822,000 - $641,160 = 2∆NP - ∆NP

∆NP = $180,840

The maximum increase in short-term debt (notes payable) without pushing its current ratio below 2.0 would be $180,840.