Question

Thomas 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

Cost of sales for the year totaled $600,000 and its gross profit is $200,000. The company president believes the company carries excess inventory. She would like the inventory turnover ratio to be 6 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 current ratio be?

Answer 1