Answered: What is the company’s inventory…

College Accounting, Chapters 1-27

23rd Edition

ISBN:9781337794756

Author:HEINTZ, James A.

Publisher:HEINTZ, James A.

Chapter13: Accounting For Merchandise Inventory

Section: Chapter Questions

Problem 4CE: Kulsrud Company would like to estimate the current inventory level. Using the gross profit method...

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Rascal Flats has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The company’s COGS are $2,000,000 and its current liabilities are $1,000,000. What is the company’s inventory turnover ratio?

Expert Solution

Step 1

The method by which it is ascertained whether there exists an optimal level of inventory in the business is known by calculating the Inventory Turnover Ratio. This ratio is generally denoted in times. The higher the ratio, the better it is for the business.

It is calculated as:

$I T R = \frac{C o s t o f G o o d s S o l d}{A v e r a g e I n v e n t o r y}$

First, calculate the Inventory by using the Current Ratio and Quick Ratio:

$C u r r e n t R a t i o = \frac{C u r r e n t A s s e t s}{C u r r e n t L i a b i l i t i e s} 1.6 = \frac{C u r r e n t A s s e t s}{1000000} C u r r e n t A s s e t s = 1600000$

Now calculate the Inventory by using the Quick Ratio:

$Q u i c k R a t i o = \frac{C u r r e n t A s s e t s - I n v e n t o r y}{C u r r e n t L i a b i l i t i e s} 1.2 = \frac{1600000 - I n v e n t o r y}{1000000} I n v e n t o r y = 400000$

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