Question

# Current and Quick Ratios The Nelson Company has \$1,312,500 in current assets and \$525,000 in current...

Current and Quick Ratios

The Nelson Company has \$1,312,500 in current assets and \$525,000 in current liabilities. Its initial inventory level is \$360,000, 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 2.2? 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 = (\$1,312,500 + ∆NP) / (\$525,000 + ∆NP) = 2.2

(\$1,312,500 + ∆NP) = 2.2(\$525,000 + ∆NP)

\$1,312,500 + ∆NP = \$1,155,000 + 2.2∆NP

\$1,312,500 - \$1,155,000 = 2.2∆NP - ∆NP

∆NP = \$131,250

The maximum increase in short-term debt (notes payable) without pushing its current ratio below 2.2 would be \$131,250.

2) Current assets = \$1,312,500 + \$131,250 = \$1,443,750

Current liabilities = \$525,000 + \$131,250 = \$656,250

Since we assumed that the additional funds would be used to increase inventory,the inventory account will increase to \$491,250.

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

Quick ratio = (\$1,443,750 - \$491,250) / \$656,250

Quick ratio = 1.45

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