Question

In: Finance

Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio...

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?

Solutions

Expert Solution

HI

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.

Thanks


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