Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0,while its quick ratio is 2.5.What are Nolan's current assets?
A) $200,000
B) $300,000
C) $400,000
D) $500,000
E) $600,000

Question

Quizplus · Accepted Answer

Nolan Inc.'s inventory turnover is given as 10.0, which is calculated by dividing the cost of goods sold by the average inventory. Therefore, the average inventory is $1,000,000 / 10 = $100,000. The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. Given that the quick ratio is 2.5, and knowing that the quick ratio formula can be rearranged to Current Assets = Inventory + (Quick Ratio * Current Liabilities), and the current ratio (Current Assets / Current Liabilities) is 3.0, we can find Current Liabilities = Current Assets / 3. Substituting this into the quick ratio formula gives us a system of equations that can be solved to find Current Assets. Since we know the inventory and the ratios, we can deduce that Current Assets must be $600,000 to satisfy the given financial ratios.

Nolan IncHas Cost of Goods Sold of $1,000,000 and an Inventory