Question

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.

Answer #1

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

= 0.93

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