Question

Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The company has a cost of goods sold of $850,000 and its current liabilities are $1.2 million. Compute the inventory turnover ratio. Select one: a. 0.90 b. 5.0 c. 1.77 d. $400,000 e. 1.66

Answer 1

Calculation of inventory turnover ratio:

To find the inventory turnover ratio we need inventory value. Since, inventory is part of current assets we will find the current assets with the help of given current liabilities of $1.2 million. Since, quick ratio is also given with the help of this ratio we will find the inventory value. after gettng inventory value we will compute inventory turnover ratio.

Current ratio = Current Assets/ Current liabilities

1.6 = Current assets/$1.2 million

Therefore, Current assets = 1.6 times X $1.2 million = $1.92 Million

Quick ratio = (Current assets - inventory) / currrent liabilities

1.2 = ($1.92 Million - inventory)/$1.2 million

1.2 times X $1.2 million = $1.92 million - inventory

$1.44 million = $1.92 million - inventory

Therefore, inventory = $1.92 million - $1.44 million = $0.48 million

Inventory turnover ratio = Cost of goods sold / average Inventory

Inventory turnover ratio = $0.85 million / $0.48 million

Inventory turnover ratio = 1.77 times

Answer is option C. 1.77