Question

Aylward Inc. currently has ​$2 comma 132 comma 000 in current assets and ​$833 comma 000 in current liabilities. The​ company's managers want to increase the​ firm's inventory, which will be financed by a​ short-term note with the bank. What level of inventories can the firm carry without its current ratio falling below 2.1​?

Answer 1

Answer:

The level of inventories the firm can carry without its current ratio falling below 2.1 is 347,909

Explanation:

Current Ratio = Current Asset (CA) / Current Liabilities (CL)

Taking into account the formula of the current ratio, to the amount of current assets and current liabilities must add an amount such that the result is 2.1.  

(2,132,000 + x) / (833,000 + x) = 2.1

(2,132,000 + x) = 2.1 * (833,000 + x)

 2,132,000 + x = (2.1* 833,000) + (2.1 x)

 2,132,000 + x = 1,749,300 + 2.1 x

 2,132,000 - 1,749,300 = 2.1 x – x

 382,700 = 1.1 x    

 382,700 / 1.1 = x

 x = 347,909

 So the maximum that should be borrowed to buy inventory is $347,909.