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)

Answer 1

Total asset turnover = Sales / Total Assets = 2

or 2,000,000 / Total Assets = 2

or Total assets = 1,000,000

Current assets = Total assets - Fixed assets = 1,000,000 - 400,000 = 600,000

Current Liabilities = Total liabilities - Long term liabilities = 400,000 - 200,000 = 200,000

Current ratio = Current Assets / Current Liabilities = 600,000 / 200,000 = 3

If the current ratio is to be reduced by 33 %, new current ratio = 2

Proposed level of current assets in 2020 to achieve this target = 200,000 x 2 = 400,000 OMR............(1)

Quick ratio for 2019 = 1.5

Quick ratio = ( Current Assets - Inventory ) / Current Liabilities = ( 600,000 - Inventory ) / 200,000 = 1.5

Inventory level in 2019 = 300,000 OMR

Selling period in 2019 = ( 365 / 2,000,000 ) * 300,000 = 54.75 days

Proposed selling period for 2020 = 45.61 days.

Inventory turnover for 2020 = 365 / 45.61 = 8 times............................(2)