ABC has 137,000 in current assets and 39,000 in current liabilities. Currently,

Question

ABC has 137,000 in current assets and 39,000 in current liabilities. Currently, inventory is at 14,000 but ABC wishes to borrow additional funds, using short-term notes payable, and use that to purchase additional inventory. However, ABC does not wish its current ratio to drop below 2.0. Assuming that ABC follows through on this plan, what will be the new Quick Ratio after they buy the new inventory? (show your answer in decimal form to three places, e.g., 0.123)

I have the answer (1.255) but do not know how to solve the problem. Help!

Explanation / Answer

 

Current Assets = $137,000

Current Liabilities = $39,000

Inventory = $14,000

 ABC whishes to borrow additional funds, using short-term notes payable, and use that to purchase additional inventory.

 ABC does not wish its current ratio to drop below 2.0

Current Ratio of ABC = 2.0
2.0 = [$137,000 / CL]
Current Liabilities * 2.0 = $137,000
Current Liabilities = [$137,000 / 2.0]
Current Liabilities = $68,500

Short-term notes payable = [$68,500 - $39,000]
Short-term notes payable = $29,500


Calculating New Quick Ratio of ABC:

Quick Ratio = [(Current Assets – Inventory) / Current Liabilities]
Current Liabilities = $68,500
Current Assets = $137,000
Inventory = $29,500

Quick Ratio = [($137,000 - $29,500) / $68,500]
Quick Ratio = [$107,500 / $68,500]

Quick Ratio = 1.569

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