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Date Posted: 10:04:33 09/25/00 Mon
Author: Charles Hodges
Subject: Re: another chapter 3 problem
In reply to: Nancy Mills 's message, "another chapter 3 problem" on 22:40:43 09/20/00 Wed

The is a ratio algebra problem. The key is that the change in Notes Payable goes into both the denominator since NP increases and the numerator since inventory increases by the same amount as notes payable.


Present current ratio = = 2.5.

NEW Minimum current ratio = (1312500+NP)/(525000+NP)=<2.0.

$1,312,500 + NP = $1,050,000 + 2NP
NP <= $262,500.

Short-term debt can increase by a maximum of $262,500 without violating a 2 to 1 current ratio, assuming that the entire increase in notes payable is used to increase current assets. Since we assumed that the additional funds would be used to increase inventory, the inventory account will increase to $637,500, and current assets will total $1,575,000.

Quick ratio = ($1,575,000 - $637,500)/$787,500 = $937,500/$787,500 = 1.19H.



> Could you explain end-of- chapter problem #3-6?
> thanks

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