Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
CURRENT RATIO The Stewart Company has $2,392,500 in current assets and $1,076,625 in current liabilities. Its initial inventory level is $526,350, 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?
To identify: The increase in short-term debt without pushing its current ratio below 2.
Current Ratio:
The current ratio is a part of liquidity ratio, which reflects the capability of the company to pay back its short-term debts. It is calculated based on the current assets and current liabilities that a company posses in an accounting period.
Current Assets:
The assets of the company, which needs to be converted into cash in less than a year or during current accounting period, are called current assets.
Current Liabilities:
The debts or liabilities that need be paid in less than one year or during the current accounting period is called current liabilities.
Given,
Current asset is $2,918,850 (working note).
Current liabilities are $1,076,625.
Formula to calculate minimum current ratio is,
Substitute 2 times for minimum current ratio, $2,918,850 for current assets and $1,076,625 for current liabilities.
Thus, the short-term debt is increased by $765,600
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