Harvey Supplies Inc.has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6.Harvey's total assets are R1 million and its debt ratio is 0.20.The firm has no long-term debt.What is Harvey's sales figure if the total cost of goods sold is 75% of sales?

Question

Quizplus · Accepted Answer

Harvey's current assets are R3 million (R1 million x 3.0). Since the firm has no long-term debt, its total debt is R200,000 (R1 million x 0.20). Thus, its current liabilities are R2.8 million (R3 million - R200,000). Since the quick ratio is 2.4, Harvey's quick assets are R2.88 million (R2.8 million x 2.4). Since the inventory turnover ratio is 6, Harvey's inventory is R480,000 (R2.88 million / 6). Thus, Harvey's cost of goods sold is R960,000 (R480,000 x 2). Since the cost of goods sold is 75% of sales, Harvey's sales are R1.28 million (R960,000 / 0.75).