Question

The Company has $1,750,000 in current assets and $700,000 in current liabilities. Its initial inventory level is $500,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Speirs's short-term debt (notes payable) increase inventory without violating a current ratio of 2.25 to 1? What will be the firm's quick ratio after Speirs has raised the maximum short-term funds? Round this value to two decimal places. Do not include $ signs or commas.

Answer 1

Answer:

How much can Speirs's short-term debt (notes payable) increase inventory without violating a current ratio of 2.25 to 1?

Notes Payable   319,990  

               Initial Ratio After Adj

Current RATIO  2,50   2,25

What will be the firm's quick ratio after Speirs has raised the maximum short-term funds?

                 Initial Ratio After Adj

Quick RATIO    1,79   1,36  

Explanation:

Assets Balance

Others  $1,250,000  

Inventory  $819,990  

TOTAL CURRENT ASSETS   $2,069,990  

TOTAL ASSETS   $2,069,990  

Notes Payable   $319,990  

Others                   $600,000

TOTAL CURRENT LIABILITIES   919,990  

                       Initial Ratio After Adj

Current RATIO  2,50   2,25  

Quick RATIO          1,79   1,36