Question

Referring to the following data of the Omani Company, that extracted from the balance sheet at 31\12\2019, answer the following questions: -       (Note; Write all Equations regarding the questions)

1. The company manager targets to reduce the current ratio in the year (2020) by 33% from the previous year (2019), this requiring to downsize the amount of the total current asset. To what level can the manager reduce the total current asset to achieve this target at (2020)? (Suppose the other things are fixed)
2. The manager put a plan to reduce the selling period in the (2020) by (16.7%) from the previous year (2019). Calculate the new inventory turnover.

(Suppose the other things are fixed)

  

Data of 2019
Total Asset Turnover	2 Times
Net Fixed Asset	400 (Thousand OMR)
Total Liabilities	400 (Thousand OMR)
Sales	2000 (Thousand OMR)
Quick Ratio	1.5 Times
Accounts Receivable	150 (Thousand OMR)
Long-term Liabilities	200 (Thousand OMR)

Use the following:

CR = Total Current AssetTotal Current Liabilities = Times (Unit of Measurement)

QR = Total Current asset -inventoryTotal Current Liabilities = Times (Unit of Measurement)

Total Current Liabilities =

                                   

Inventory turnover = Sales / Inventory = Times

Selling Period = (Inventory x 360) / Sales = Days

ART = SalesAccount Receivable = Times

DSO = account receivable x 360sales = Days

Total Asset Turnover = Sales / Total Asset

                                     = Times

Answer 1

Total Asset Turnover Ratio =Sales/Total Asset= 2000/Total Assets= 2 times

Hence, Total Assets = 1000 (thousand )OMR

Net Fixed Assets = 400 OMR , Hence Current Assets = 600 OMR

Total Liabilities = 400(thousand) OMR, Accounts receivable= 150 thousand OMR,

Long term liabilities = 200 thousand OMR

Hence, Other current liabilities = 400-200- 150- 50 thousand OMR

Hence total current liabilities= 150+50= 200 thousand OMR

Quick ratio = Current Assets- Inventory/ Current Liabilities

= 600- Inventory/200= 1.5 times

Hence 600- Inventory = 300

Hence Inventory = 300 thousand OMR

Current Ratio= Current Assets/Current Liabilities

= 600/200 = 3 times

Now the manager wants to reduce the current ratio by 33% i.e , he wants to maintain the ratio at 2 times , hence current assets would have to be reduced to 200*2= 400,i.e. reduced by 200 thousands OMR

Manager wants to decrease selling price by 16. 7% in year 2020 and other things remaining unchanged.

Sales in 2020= 2000-16.7%= 1666 thousand OMR

Hence Stock Turnover ratio in 2020= Sales/Inventory= 1666/200= 8.33 times(Assuming inventory will also be decreased by 33% to maintain new current ratio