Selected year-end data for the Brayer Company are presented below: $\begin{array}{lr}
\text { Current liabilities.. }&\$600,000\\text { Acid-test ratio }&2.5\\text { Current ratio }&3.0\\text { Cost of goods sold }&\$500,000
\end{array}$
The company has no prepaid expenses and inventories remained unchanged during the year.Based on these data,the company's inventory turnover ratio for the year was closest to:
A)1.20
B)2.40
C)1.67
D)2.33

Question

Selected year-end data for the Brayer Company are presented below: $\begin{array}{lr}
\text { Current liabilities.. }&\$600,000\\text { Acid-test ratio }&2.5\\text { Current ratio }&3.0\\text { Cost of goods sold }&\$500,000
\end{array}$
 The company has no prepaid expenses and inventories remained unchanged during the year.Based on these data,the company's inventory turnover ratio for the year was closest to:
A)1.20
B)2.40
C)1.67
D)2.33

Quizplus · Accepted Answer

Inventory turnover ratio = Cost of goods sold / Average inventoryAverage inventory = (Beginning inventory + Ending inventory) / 2Since inventories remained unchanged during the year, Beginning inventory = Ending inventoryTherefore, Average inventory = Beginning inventoryWe do not have the beginning inventory, but we can use the acid-test ratio to calculate it.Acid-test ratio = (Cash + Marketable securities + Accounts receivable) / Current liabilities2.5 = (Cash + Marketable securities + Accounts receivable) / 600,000Cash + Marketable securities + Accounts receivable = 1,500,000Since the company has no prepaid expenses, Accounts receivable = Current assets - Inventory - Prepaid expensesAccounts receivable = Current assets - InventoryAccounts receivable = 1,500,000 - InventoryTherefore, Beginning inventory = 1,500,000 - Accounts receivableInventory turnover ratio = 500,000 / (1,500,000 - Accounts receivable)We do not have the Accounts receivable, but we can use the current ratio to calculate it.Current ratio = Current assets / Current liabilities3.0 = (Cash + Marketable securities + Accounts receivable + Inventory) / 600,000Cash + Marketable securities + Accounts receivable + Inventory = 1,800,000Therefore, Accounts receivable = 1,800,000 - InventoryInventory turnover ratio = 500,000 / (1,500,000 - (1,800,000 - Inventory))Inventory turnover ratio = 500,000 / (1,500,000 - 1,800,000 + Inventory)Inventory turnover ratio = 500,000 / (-300,000 + Inventory)Since the inventory turnover ratio cannot be negative, we can conclude that Inventory > 300,000.Therefore, the inventory turnover ratio is closest to 1.67.

Selected Year-End Data for the Brayer Company Are Presented Below