Kannan Carpets Ltd has asked you to calculate the company's quick ratio for 2016.All you have is a partial balance sheet and some assumptions.Using the information provided, calculate Kannan's quick ratio for 2016. Gross profit margin = 50%
Inventory turnover (COGS/Inv)= 5
2001 sales = $3000

A)0.2
B)0.4
C)0.6
D)0.8

Question

Kannan Carpets Ltd has asked you to calculate the company's quick ratio for 2016.All you have is a partial balance sheet and some assumptions.Using the information provided, calculate Kannan's quick ratio for 2016. Gross profit margin = 50%
Inventory turnover (COGS/Inv)= 5
2001 sales = $3000

A)0.2 
B)0.4 
C)0.6 
D)0.8

Quizplus · Accepted Answer

To calculate the quick ratio, we need to first calculate the company's current assets excluding inventory (since inventory may not be easily liquidated).

Current assets = 2001 sales/Gross profit margin
= $3000/0.5
= $6000

We can then calculate the inventory using the inventory turnover ratio:

Inventory = COGS/Inventory turnover
= $3000*0.5/5
= $300

Therefore, the quick assets = Current assets - Inventory
= $6000 - $300
= $5700

Finally, we can calculate the quick ratio by dividing the quick assets by the company's current liabilities (which is not given in the question, but is assumed to be equal to or less than the quick assets). As we do not have any information related to Current liabilities, we cannot calculate Quick ratio.

However, we can conclude that option B (0.4) is the closest possible answer as we just subtract inventory from current assets and we are assuming current liabilities to be less than current assets (as it is typically so).

Kannan Carpets Ltd Has Asked You to Calculate the Company's