Current and Quick Ratios The Nelson Company has 1950000 in c

Current and Quick Ratios

The Nelson Company has $1,950,000 in current assets and $650,000 in current liabilities. Its initial inventory level is $520,000, and it will raise funds as additional notes payable and use them to increase inventory.

1. How much can Nelson\'s short-term debt (notes payable) increase without pushing its current ratio below 1.4? Round your answer to the nearest cent.

Solution

Current Assets 1,365,000 Current Liabilities 650,000 Current Ratio = 1365 / 650 = 2.1
Let X be the amount they can add to Inventory and Notes Payable. Then
1,365,000 + X = (650,000 + X)(2)
1,365,000 + X = 1,300,000 + 2X
65,000 = X

Revised Current Assets - 1365 + 65 = 1430
Revised Current Liabilities - 650 + 65 = 715
New Current Ratio - 1430 / 715 = 2.0