Question

Your firm has a current ratio of 2.5 and a quick ratio of 1.5 with current assets of $250,000 and an inventory turnover ratio of 12. If cost of goods sold run 55% of sales for your firm and your profit margin is 6%, what is your firm’s net income?

Answer 1

i) Current ratio = Current assets / Current Liabilities

2.5 = 250000 / Current Liabilities

Current Liabilities = 250000/2.5

Current Liabilities = 100000

ii)

Quick ratio = Current assets - inventory / Current Liabilities

1.5 = (250000 - Inventory) / 100000

100000*1.5 = 250000 - Inventory

150000 = 250000 - Inventory

Inventory = 100000

iii)

inventory turnover ratio (times) = cost of goods sold / inventory

12 = cost of goods sold /100000

cost of goods sold = 100000*12

cost of goods sold =1200000

iv)

cost of goods sold = 55% of sales

1200000 = 55% of sales

Sales = 1200000 / 55%

Sales = 2181818.18

v)

Profit Margin = Net income / sales

6% = Net income /2181818.18

Net income = 2181818.18 * 6%

Net income = 130909