Current and Quick Ratios The Nelson Company has $1,437,500 in current assets and

Question

Current and Quick Ratios

The Nelson Company has $1,437,500 in current assets and $625,000 in current liabilities. Its initial inventory level is $437,500, 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.

________

Explanation / Answer

1) current tatio =current asset /current liabilties

       2.1 = (1,437,500 + x ) / (625,000 +x)

      2.1 (625000+x) = 1437500 +x

       1312500+2.1 x= 1437500+x

         2.1x- x= 1437500-1312500

           1.1 x = 125000

           x = 125000/1.1 = 113,636.36

Increase in note payable = $ 113,636.36

**increase in note payable will increase both inventory (current asset) and note payable (current liability ) by x

2)Total inventory = 437500+ 113636.36 = 551136.36

Total current asset = 1437500+113636.36= 1551136.36

Total current liability = 625000+113636.36 = 738636.36

Quick ratio = (current asset -inventory ) /current liability

               = (1551136.36- 551136.36)/ 738636.36

                = 1,000,000/ 738636.36

                  = 1.35:1

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