Question

# The Nelson Company has \$1,444,500 in current assets and \$535,000 in current liabilities. Its initial inventory...

The Nelson Company has \$1,444,500 in current assets and \$535,000 in current liabilities. Its initial inventory level is \$405,000, 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.

1) Current ratio = (\$1,444,500 + ∆NP) / (\$535,000 + ∆NP) = 1.8

(\$1,444,500 + ∆NP) = 1.8(\$535,000 + ∆NP)

\$1,444,500 + ∆NP = \$963,000 + 1.8∆NP

\$1,444,500 - \$963,000 = 1.8∆NP - ∆NP

∆NP = \$601,875

The maximum increase in short-term debt (notes payable) without pushing its current ratio below 1.8 would be \$601,875.

2) Current assets = \$1,444,500 + \$601,875 = \$2,046,375

Current liabilities = \$535,000 + \$601,875 = \$1,136,875

Since we assumed that the additional funds would be used to increase inventory,the inventory account will increase to \$1,006,875

Quick ratio = (Current assets - Inventory) / Current liabilities

Quick ratio = (\$2,046,375 - \$1,006,875) / \$1,136,875

Quick ratio = 0.91