Question

Current and Quick Ratios

The Nelson Company has $1,080,000 in current assets and $400,000 in current liabilities. Its initial inventory level is $240,000, 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 2.4? Round your answer to the nearest cent.

$  

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.

When I multiplied 2.4X400,000= 960,000 then subtracted 1,080,000-960,000=120,000 the answer is still incorrect. Am I missing something?

Answer 1

Curent Assets: $ 1080000
Current liabilities: 400000
When X amount is borroed for short term and invested in inventry, then
Revised Current assets: 1080,000 +X
Revised Current liabilites: 400,000+X
Revised Current ratio to be 2.4
Current ratio: Current Assets/ Current liabilities
2.4 = 1080000+ X   / 400000+X
X amount: $ 85714
Amount of Short term borrowings: $ 85714
Revised Quick assets:1080000-240000 =840000
Revised current liabilities:400000+85714 = $ 485,714
Quick ratio: Quick assets/ Current liabilities
	840,000 /485714 = 1.73