Question

The Nelson Company has $1,512,000 in current assets and $540,000 in current liabilities. Its initial inventory level is $380,000, and it will raise funds as additional notes payable and use them to increase inventory. 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

The maxumum amount of short term notes funds that can be raised is such that the current ratio is equal to 1.

Current Assets = 1,512,000

Current Liabilities = 540,000

To have the current ratio equal to 1, current assets must be equal to current liabilities

So, Additional funds needed = (1,512,000 - 540,000) = $ 972,000 which is used to purchase additonal inventory.

Present inventory = $ 380,000

Total inventory = (380,000 + 972,000) = $ 1,352,000

Quick ratio = (Current Assets - Inventory)/Current Liabilities = (1,512,000-1,352,000)/ (1,512,000) = 0.105