Question

In: Finance

Texas Instrument Corp. has the following simplified balance sheet:

Cash $ 50,000 Current liabilities $125,000

Inventory 150,000

Accounts receivable 100,000 Long-term debt 175,000

Net fixed assets 200,000 Common equity 200,000

Total $500,000 Total $500,000

Net Sales for the year totaled $600,000 and its gross profit is $100,000. The company president believes the company carries excess inventory. She would like the inventory turnover ratio to be 8 times and would use the cash that we free up from reducing the inventory to meet the targeted inventory turnover to reduce current liabilities. If the company follows the president's recommendation and sales remain the same, what would new quick ratio be?

Expert Solution

1. Cost of goods sold = Sales - Gross profit = 600000 - 100000 = 500000

2. Inventory under new inventory turnover ratio = Cost of goods sold / Inventory = 8

500000 / Inventory = 8

Inventory = 62500

2. New Current Liabilities = Present Current Liabilities - Reduction in inventory

New Current Liabilities = 125000 - (150000 - 62500)

New Current Liabilities = $37500

3. New Quick ratio = Cash + Accounts receivable) / New current liabilities

New Quick ratio = 150000 / 37500

New Quick ratio = 4 times

jeff jeffy answered 2 years ago

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