September 19, 2021 at 5:45 pm #3306107MauraParticipant
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?September 20, 2021 at 12:15 pm #3306122monikerncParticipant
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
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
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…