[Maura]

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?

[monikernc]

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…

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[Author]

Replies