Problem 3-9 Current and Quick Ratios The Nelson Company has $977,500 in current
ID: 2772891 • Letter: P
Question
Problem 3-9
Current and Quick Ratios
The Nelson Company has $977,500 in current assets and $425,000 in current liabilities. Its initial inventory level is $340,000, and it will raise funds as additional notes payable and use them to increase inventory.
How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.8? Round your answer to the nearest cent.
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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
Current assets = 977,500
Current liabilities = 425,000
We have the following formula for current ratio
Curent ratio = Current assets / curent labilités
1.80 = 977,500/ (425,000+ Notes payable)
425,000+ Notes payable = 543,055.6
Notes payable = 543,055.6- 425,000
= 118055.6
They can increase short term debt by 118055.6 without pushing current ratio to 1.80.
New current liabilities =118,055.6+ 425,000
= 543,055.6
New quick ratio = (total current assets – inventory)/ total current liabilities
= (977,500 -340,000)/ 543,055.6
= 1.17
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