Question

The Nelson Company has $1,428,000 in current assets and $510,000 in current liabilities. Its initial inventory level is $335,000, 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? Do not round intermediate calculations. Round your answer to the nearest dollar.

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What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Current ratio = Current asset / Current Liabilities

1.8 = 1,428,000/ ( 510,000 + short term debt)

510,000 + Short term debt = 1,428,000/1.8

Short term debt = 793,333.33 - 510,000

= $ 283,333

Therefore maximum short term debt that can be raised is $283,333

Quick ratio

= ( Current assets - Inventory)/ Current Liabilities

Total current liabilities = 510,000 + 283,333 = $793,333

= ( 1,428,000 - 335,000)/793,333

= 1.38

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