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.
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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.
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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