Question

Current and Quick Ratios The Nelson Company has $1,250,000 in current assets and $500,000 in current liabilities. Its initial inventory level is $335,000, 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.

Answer 1

Explanation:

$1,250,000 in current assets (cr) and $500,000 in current liabilities(cl)

current ratio (cr)=1250000/500000=2.5

Δ note payable ( change in note payable NP)

minimum current=2.2

2.2=(1250000+ΔNP)/(500000+ΔNP)

2.2(500000+ΔNP)=1250000+ΔNP

1100000+2.2ΔNP=1250000+ΔNP

2,2ΔNP-ΔNP=1250000-1100000

1.2ΔNP=150000

ΔNP=150000/1.2=125000

Nelson's short-term debt (notes payable) increase without pushing its current ratio below 2.2=125000

assuming this amount used to increase the inventory

new inventory=335000+125000=360000

current asset= 1250000+125000=1375000

the new ratio=(1375000-360000)/500000+125000

new ratio = 1.624