Selected data from Sheridan Corporation's year-end financial statements are presented below.The difference between average and ending inventory is immaterial. $\begin{array}{ll}
\text { Current Ratio } & 2.0 \
\text { Aoid-Test Ratio } & 1.5 \
\text { Current Liabilities } & \$ 120,000 \
\text { Inventory Turnover } & 8 \text { times } \
\text { Gross Profit Margin } & 40 \% \
\text { Prepaid Expenses } & \$ 0
\end{array}$ What were Sheridan's sales for the year?

Question

Quizplus · Accepted Answer

We can use the information given to calculate Sheridan's sales using the following formula:

Sales = Cost of Goods Sold / Gross Profit Margin

We can find Cost of Goods Sold using the Inventory Turnover ratio:

Cost of Goods Sold = Average Inventory / Inventory Turnover

Since we are given that the difference between average and ending inventory is immaterial, we can assume that average inventory is roughly equal to ending inventory. Thus:

Cost of Goods Sold = Ending Inventory / Inventory Turnover

We can solve for Ending Inventory using the Current Ratio and the Acid-Test Ratio:

Current Assets / Current Liabilities = Current Ratio
Current Assets - Inventory - Prepaid Expenses / Current Liabilities = Acid-Test Ratio

Plugging in the values we know:

2.0 = Current Assets / $120,000
1.5 = (Current Assets - Ending Inventory) / $120,000
Ending Inventory = Current Assets - $80,000

Solving for Current Assets:

$240,000 = Current Assets

Plugging everything into the first formula:

Sales = Cost of Goods Sold / Gross Profit Margin
Sales = (Ending Inventory / Inventory Turnover) / Gross Profit Margin
Sales = ($30,000 / 8) / 0.4
Sales = $75,000
Sales = $800,000

Selected Data from Sheridan Corporation's Year-End Financial Statements Are Presented