Question

The Kretovich Company had a quick ratio of 0.8, a current ratio of 4.0, a days' sales outstanding of 36.5 days (based on a 365-day year), total current assets of $920,000, and cash and marketable securities of $95,000. What were Kretovich's annual sales? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Step-1:Calculation of Current Liabilities
	Current Liabilities		=	Current Assets /Current Ratio
			=	$       9,20,000	/	4.0
			=	$       2,30,000
Step-2:Calculation of Quick Assets
	Quick Assets		=	Current Liabilities x Quick Ratio
			=	$       2,30,000	x	0.8
			=	$       1,84,000
	The difference between current assets and Quick Assets is that quick assets takes into account
	only those current assets that are convertible into cash with very short time like 90 days.
	So, Quick assets takes into account Cash, Marketable securities, Accounts Receivable.
	Since Cash and Marketable Securities is already given in the question, balance is Accounts Receivable.
Step-3:Calculation of Accounts Receivable
	Accounts Receivable			=	Total Quick Assets - Cash and Marketable Securities
				=	$ 1,84,000	-	$ 95,000
				=	$     89,000
Step-4:Calculation of Annual Sales
	Annual Sales		=	Accounts Receivable x Accounts Receivable Turnover ratio
			=	$           89,000	x	10
			=	$       8,90,000
	Working:
	Accounts Receivable Turnover ratio				=	Days in a Year/Days sales outstanding
					=	365	/	36.5
					=	10
	Thus,
	Kretovich's annual sales were			$ 8,90,000