Question

# Current and Quick Ratios The Nelson Company has \$1,260,000 in current assets and \$450,000 in current...

Current and Quick Ratios

The Nelson Company has \$1,260,000 in current assets and \$450,000 in current liabilities. Its initial inventory level is \$300,000, 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 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 answer to two decimal places.

Let the 'x' be the increase in shortterm debt and increase in inventory at the same time

Target current ratio = Current asset / Current liabilities = 2

So 2 =[ 1260,000 + x] / [ 450,000 + x ]

900,000 + 2x = 1260,000 + x

900,000 + x = 1260,000

So X = 1260,000-900,000 = 360,000

So increase in shortterm debt and increase in inventory at the same time is 360,000

Now will calculate quick ratio after change

Quick ratio = Current asset - Inventory / Current liability

=[ 1260,000+ 360,000 - (300,000+360,000) ] / 450,000+360,000

=960,000 / 810,000

= 1.19

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