Current and Quick Ratios The Nelson Company has $1,363,000 in current assets and $470,000 in current liabilities. Its initial inventory level is $330,000, 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.
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.
Let us first find out amount that can be increased in current asset,
Current ratio = Current Asset/Current Liability
1.8 = 1,363,000 + Change in NP / 470,000 + Change in NP
1.8 (470000 + Change in NP) = 1363000 + Change in NP
846000 + 1.8 Change in NP = 1363000 + Change in NP
0.8 Change in NP = 517000
Change in NP = 646250 $
Thus Nelson's can increase short-term debt (notes payable) of $ 646250 without pushing its current ratio below 1.8
2) Quick Ratio = Current asset less inventory / Current Liability
= 1363000 - 330000 / 470000 + 646250
= 1033000 / 1116250
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