Network Systems, Inc., had net sales of $750,000, cost of goods sold of $562,500, and net income of $100,000. Its gross margin r
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Answer:
(a) Short-term debt can increase by a maximum of $466,666.67 without pushing its current ratio below 1.9
(b) The firm's quick ratio after Nelson has raised the maximum amount of short-term funds is 1.34
Explanation:
Current assets = $1,750,000
Current liabilities = $700,000
Initial inventory level = $490,000
Current ratio = Current assets ÷ Current liabilities
= $1,750,000 ÷ $700,000 = 2.5
1.9 = (Current assets + ) ÷ (Current liabilities +
)
1.9 = ($1,750,000 + ) ÷ ($700,000 +
)
1.9 × ($700,000 + ) = ($1,750,000 +
)
$1,330,000 + = $1,750,000 +
= $1,750,000 - $1,330,000
= $466,666.67
Short-term debt can increase by a maximum of $466,666.67 without pushing its current ratio below 1.9
Quick ratio = (Current assets - Inventories) ÷ Current liabilities
= $937,500 ÷ $700,000
= 1.34