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 $400,000, 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 1.2

Nelson's short-term debt (notes payable) can increase by $541,667 without pushing its current ratio below 1.2.

Explanation:

We know that the formula for calculating the current ratio is as follows:

Current ratio = Current Assets / Current Liabilities (1)

Where;

Existing Current assets = $1,250,000

Existing current liabilities = $500,000

Existing Current ratio = $1,250,000 / $500,000 = 2.50

Since we want to keep the current assets at $1,250,000, and targeted current ratio is 1.2; we want to determine the following:

Targeted current liabilities = ?

We therefore also use and substitute into equation (1) as follows:

Targeted current ratio = Existing Current assets / Targeted current liabilities

Therefore, we have:

1.2 = $1,250,000 / Targeted current liabilities

Solving for Targeted current liabilities, we have:

Targeted current liabilities = $1,250,000 / 1.2 = $1,041,667

Therefore, we have:

Targeted increase in  short-term debt = Targeted current liabilities - Existing current liabilities = $1,041,667 - $500,000 = $541,667

Therefore, Nelson's short-term debt (notes payable) can increase by $541,667 without pushing its current ratio below 1.2.

these are the four factors that influence enterpreneurship development

1. economic development

2. culture

3.technological development

4. education

the answer is a.

by: nicholas dooley