Question

The Stewart Company has $1,733,500 in current assets and $780,075 in current liabilities. Its initial inventory level is $520,050, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? Round your answer to the nearest dollar.

Answer 1

Let’s take “X” as the additional notes payables used to increase inventory.

Current Ratio = Total Current Assets / Total Current Liabilities

2.00 = [$17,33,500 + X] / $780,075

[2.00 x $780,075] = $17,33,500 + X

$15,60,150 = $17,33,500 + X

X = $17,33,500 - $15,60,150

X = $173,350

Therefore, the Stewart Company can increase its short-term debt (notes payable) to $173,350 without pushing its current ratio below 2.00.

“Hence, the increase in the short-term debt (notes payable) would be $173,350”