BEC MCQ different way of solving needed.

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  • #3306107 Reply
    Maura
    Participant

    Hi fellow CPA candidates!

    I am prepping for BEC and this question throws me off:

    A company has $1,500,000 in current assets and $500,000 in current liabilities. The company's current inventory level is $250,000, and it plans to issue short-term debt to increase inventory. What is the largest amount of short-term debt the company may issue to increase inventory without dropping the current ratio below 2.0

    Becker explanation is algebraic and math is not my strongest suit and I do not understand their explanation. Could someone walk me through this problem?

    #3306122 Reply
    monikernc
    Participant

    This is not difficult math when you understand the current ratio = CA/CL. Right now the current ratio is CA=1,500,000/CL=500,000,1,500,000/500,000=3.0. The goal is to add an amount to current liability to increase a current asset and keep the current ratio = 2.0 You have to solve for x, which is the increase in the amount of the short term debt. a current liability, that will be used to increase inventory, a current asset, to equal 2.0.

    Plugging the values into the formula to solve for x is: 1,500,000+x/500,000+x = 2.0
    1,500,000+x=2(500,000+x)
    1,500,000+x=1,000,000+2x
    500,000=2x-x
    500,000=x
    Plug the value of x into the equation to prove the current ratio will be 2.0 when you add 500,000 in inventory and 500,000 in short term debt.
    1,500,000+500,000/500,000+500,000 = 2
    2,000,000/1,000,000=2

    Don't be afraid of math and don't tell yourself you cannot do it. Practice it until you build up confidence in your ability. Positive self talk is key. You can do this…

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