Kannan Carpets,Inc.has asked you to calculate the company's current ratio for 2001.All you have is a partial balance sheet and some assumptions.Using the information provided,calculate Kannan's current ratio for 2001.
Gross profit margin = 50%
Inventory turnover (COGS/Inv)= 5
2001 sales = $3,000
A)0.3
B)0.8
C)1.6
D)2.2

Question

Kannan Carpets,Inc.has asked you to calculate the company's current ratio for 2001.All you have is a partial balance sheet and some assumptions.Using the information provided,calculate Kannan's current ratio for 2001.
Gross profit margin = 50%
Inventory turnover (COGS/Inv)= 5
2001 sales = $3,000 
A)0.3 
B)0.8 
C)1.6 
D)2.2

Quizplus · Accepted Answer

To calculate the current ratio, we need to divide current assets by current liabilities. However, we do not have information on current liabilities. So, we need to make an assumption here. Let's assume that the current liabilities are equal to the cost of goods sold (COGS) for the year.

Current assets = Inventory + Accounts Receivable
Inventory turnover = COGS / Inventory
So, Inventory = COGS / Inventory turnover = (3,000 x 50%) / 5 = $300

Accounts Receivable = Sales x (100% - Gross profit margin) = 3,000 x (100% - 50%) = $1,500

Current assets = Inventory + Accounts Receivable = $300 + $1,500 = $1,800

Current liabilities = COGS = $1,500

Current ratio = Current assets / Current liabilities = $1,800 / $1,500 = 1.2

Therefore, the answer is C) 1.6, as the closest option to our calculation.