Question

The Nelson Company has $1,260,000 in current assets and $450,000 in current liabilities. Its initial inventory level is $285,000, 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 2.0? 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 change in CA and CL be X

Current ratio = Current assets / Current liabilities

2 = ( 1,260,000 + X) / ( 450,000 + X)

900,000 + 2X = 1,260,000 + X

X = 360,000

Nelson's short term debt will increase by $360,000 without pushing it's current ratio below 2.

Current assets = 1,260,000 + 360,000 = 1,620,000

Current liabilities = 450,000 + 360,000 = 810,000

New inventory = 285,000 + 360,000 = 645,000

Quick ratio = ( 1,620,000 - 645,000) / 810,000

Quick ratio = 1.204