Question

A firm has current liabilities equal to $3 million, a current ratio of 2.0 , and a quick ratio of 1.2 . If the firm has costs of goods sold (COGS) equal to $8 million, what is its inventory turnover ratio?

A. 0.3
B. 0.8
C. 1.33
D. 1.6
E. 3.33

Answer 1

Using the current ratio and quick ratio given, we calculate the firm's inventory to be $2.4 million. The inventory turnover ratio is found by dividing the cost of goods sold by the inventory, yielding an inventory turnover ratio of 3.33.

Step-by-step explanation:

To determine the firm's inventory turnover ratio, we must first calculate the firm's inventory level. We can do this by using the current ratio and the quick ratio. The current ratio is calculated by dividing current assets by current liabilities, so if the firm's current liabilities are $3 million and the current ratio is 2.0, their current assets are $6 million (2.0 * $3 million).

The quick ratio is calculated by subtracting inventory from current assets and then dividing by current liabilities. To find the inventory, we rearrange the quick ratio formula: (Current Assets - Inventory) / Current Liabilities = Quick Ratio. This gives us Inventory = Current Assets - (Quick Ratio * Current Liabilities). From the question, we know the firm has a quick ratio of 1.2, so Inventory = $6 million - (1.2 * $3 million) = $6 million - $3.6 million = $2.4 million.

To find the inventory turnover ratio, we divide the cost of goods sold (COGS) by the average inventory. Assuming the inventory level remains relatively constant, Inventory Turnover Ratio = COGS / Inventory. With COGS at $8 million and inventory at $2.4 million, the inventory turnover ratio would thus be $8 million / $2.4 million = 3.33. Therefore, the correct answer is E. 3.33.