Short term debt and quick ratio for small firm
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Organic Fuels has $1,312,500 in current assets and $525,000 in current liabilities. The company's initial inventory level is $375,000, and it will issue notes payable and use the proceeds to increase inventory.
a. How much can Organic Fuels' short-term debt (notes payable) increase without pushing its current ratio below 2.0?
b. What will be the firm's quick ratio after Organic Fuels has raised the maximum amount of short-term funds?
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Solution Summary
This solution illustrates how to compute the maximum amount of short-term debt a company can assume (if it uses the debt to buy inventory) without exceeding its target current ratio. It then illustrates how to compute its quick ratio once that debt is assumed.
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a. How much can Organic Fuels' short-term debt (notes payable) increase without pushing its current ratio below 2.0?
Because the proceeds of the note are used to buy inventory, and inventory is a current asset, the company's current assets and current liabilities will increase by ...
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