Determine the cost of sales for a firm with the following financial ratios and data: Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times
A) $2,000,000
B) $6,000,000
C) $3,000,000
D) $1,000,000

Question

Quizplus · Accepted Answer

The inventory turnover ratio is calculated as Cost of Sales / Average Inventory. Given the inventory turnover is 6 times, we can find the average inventory. The current ratio and quick ratio help determine the inventory level. Current assets = Current liabilities * Current ratio = $3,000,000. Quick assets = Current liabilities * Quick ratio = $2,000,000. Therefore, Inventory = Current assets - Quick assets = $1,000,000. Using the inventory turnover ratio: Cost of Sales = Inventory Turnover * Average Inventory = 6 * $1,000,000 = $6,000,000.

Determine the Cost of Sales for a Firm with the Following