​(Evaluating liquidity​) Aylwa

​(Evaluating liquidity​) Aylward Inc. currently has ​$2,145,000in current assets and ​$859,000 in current liabilities. The​company’s managers want to increase the​ firm’s inventory, whichwill be financed by a​ short-term note with the bank. What level ofinventories can the firm carry without its current ratio fallingbelow 2.1​?

The cost of the additional inventory financed with the​short-term note is $____? (Round to the nearest dollar)

Answer:

Answer =1
Current Ratio = Current Assets / Current Liabilities
Exuisting
Current Ratio =
Current Assets = $21,45,000
Divide By “/”By
Current Liabilities = $8,59,000
Current Ratio =                             2.50
Current Ratio =                             2.50
Company want t maintain the ratio of 2.1 with increase in
So it means $ 2,145,000 / $ 859,000 = 2.50
Let x be the amount borrowed, which is used to buyinventory.
($2,145 000 + x) / ($859 000 + x) = 2.1
Multiply both sides by the denominator to get ridof the fractions.
($2 145 000 + x) = 2.1 * ($859 000 + x)
Expand and simplify
$2 145 000 + x = 2.1 * $859 000 + 2.1x
$2 145 000 + x = $1 803 900 + 2.1x
Move all terms with x to the left and all otherterms to the right. Remember to switch signs when you switchsides.
x – 2.1x = $1 803 900 – $2 145 000
-1.1x = -$ 341 100 0
Divide both sides by -1.1
x = $310,091
So the maximum that should be borrowed to buyinventory is $310,091
Answer = $3,10,091
Note: Checking the answer with addition of buyingof inventory
Exuisting Purchase of inventory with Short termNote Total
Current Ratio =
Current Assets = $21,45,000 $3,10,091 $24,55,091
Divide By “/”By
Current Liabilities = $8,59,000 $3,10,091 $11,69,091
Current Ratio =                             2.50            2.10
Current Ratio =                             2.50            2.10

 
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