Question

Over the past year, M.D. Ryngaert & Co. has realized an increase in its current ratio and a drop in its total assets turnover ratio. However, the company's sales, quick ratio, and fixed assets turnover ratio have remained constant. What explains these changes?

Answer 1

The above situation explains that the overall situation is the rise in Current assets of the M.D. Ryngaert & Co. Because the there is an increase in Current ratio, the current ratio explain us that how much of the amount of current assets the company currently carries with per $1 liability of company so if suppose the company have current assets of $ 200000 and current liability of $ 50000 , the current ratio will be 4/1or 4:1, which shows that with $1 current liability the company has $ 4 current assets.

Secondly the drop in total assets turnover ratio also signifies that the there is increase in the amount of current assets like Debtors and cash but except the inventory because the quick ratio does not change which excludes inventory in its formula.

Total assets ratio and quick ratio formula

Total asset ratio = sales / total assets

Because of the total assets(current assets + Fixed assets) are in denominator the ratio drops because of the increase in Current assets the sales amount gets reduced as per the company's total assets. Only current assets increased and not fixed assets because the fixed asset ratio and sales remain constant.

Example taken from above mentioned values, suppose $1000000 sale is made and current assets which increased to $200000 and fixed assets is $300000.

=Total assets turnover ratio = net sales / total assets

Net sales = $ 1000000

Total assets = current assets + fixed assets

Total assets = $200000 + $300000 = $500000

Total assets turnover ratio = $ 1000000 / $ 500000

Total assets turnover ratio is 2:1

Quick ratio = Current assets - Inventory / Current liability (ratio remains constant)

So the conclusion of all above is the increase in Current Assets and except stock or inventory because it is necessary in any business and it may not be increased due to the constant quick ratio.