Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed assets turnover ratio remained constant. What balance sheet accounts must have changed to produce the indicated changes?
Current Ratio = Current Asset/ Current liability
Asset Turnover ratio = Sales/Total Asset
however sales, cash and equivalent DSO and fixed asset turnover ratio remain constant
now fixed asset turn over ratio = Sales/fixed asset
Since sales has not changed and fixed asset turn over ratio is also constant that means fixed asset also will remain constant
that means in asset there is change in current assets.
now DSO (Days sales outstanding) = (Account Receivable/Total Sales)*number of days
As we already know that Sales has not changed and DSO is also constant that means Account receivable is also constant.
So Current Asset has changes in Asset but Current Asset consists of following:
Current Asset = Account Receivable +Cash and equivalent+Inventory
and we have seen that Account Receivable and Cash also is constant
So in considering all scenario, Inventory in balance sheet must have changed to produce all the changes.