The Nelson Company has $1,440,000 in current assets and $600,000 in current liabilities. Its initial inventory level is $480,000, and it will raise funds as additional notes payable and use them to increase inventory.
Current assets= $1,440,000
Current liabilities= $600,000
Since the additional notes payable I raised will be used in inventory, the new current assets:
Current ratio= current assets/ current liabilities
1.9= $1,440,000+ I/ $600,000 + I
Solving the above, I = $333,333.
Therefore, the maximum short term debt that can be raised is $333,333.
The new inventory= $480,000 + $333,333= $813,333.
Quick ratio= Current assets- inventory/ Current liabilities
= $1,440,000- 813,333/ $600,000
= $626,667/ $600,000 = 1.04.
Therefore, the firm’s quick ratio will be 1.04 after nelson has raised the maximum amount of short term funds.
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