[jaskaransingh]

Commerce Students or Teachers Please Help Me...
there is a question given in my book :
Given :
Stock Turnover Ratio = 5 times
Stock in the end is 20000 more than that of the beginning
sales(all credit) are Rs. 400000
rate of gross profit on cost is 25%
current liabilities Rs. 120000
Acid test Ratio 0.75 times
Calculate CURRENT ASSETS?

[dom.b.fortin]

Stock here means inventory right?

I. First is we have to find the components of Current Assets. Normally and for simplicity Current Assets include:
Cash
Accounts Receivable
Short-term Investments
Inventory

We can use the Acid Test Ratio to get Current Assets, Acid test Ratio has the following formula: (Cash+AccountsRec+ShorttermInvestments)/Current Liabilities
based on the formula and the list of current assets only inventory was left out, so we can simply put that Acid Test Ratio is
(Current Assets - Inventories)/Current Liabilities
Let's call this (Current Assets - Inventories) as Acid Test Current Assets

So if we equate that Acid Test Current Assets/Current Liabilities = 0.75
Acid Test Current Assets/120,000 = 0.75
Acid Test Current Assets = 0.75 * 120,000 = 90,000

Back to Current Assets = Acid Test Current Assets + Inventories
Current Assets = 90,000 + Inventories
We lack only Inventories in the solution now.

II. To find Inventories(ending balance)
A. We have to find an amount in the given that uses Inventories(ending balance); and this would be that Stock end is 20,000 more than beginning:
So Inv(end) = Inv(beg) + 20,000
So we need Inv(beg) to solve Inv(end)
B. We have to find an amount in the given that uses Inv(beg) and this would be the Stock Turnover Ratio = 5 times
Formula: Stock Turnover Ratio = Cost of Goods Sold/Average Inventory
In turn, Average Inventory = (Inventory Beg + Inventory Ending)/2
We can't figure out Inv(beg) and Inv(end) yet so we compute for Cost of Goods Sold(COGS).
C.We need to find first Cost of Goods Sold(COGS), the inventories sold during the period. Here we use the Gross Profit on Cost Rate which is 25%.
This rate means that 25% of Cost of Goods Sold equals Profit.
So:
Sales - COGS = Gross Profit
Sales - COGS = COGS*25%
400,000 - COGS = .25COGS
400,000 = 1.25COGS
COGS = 320,000

D. Then we use COGS in the formula above:
Stock Turnover Ratio = COGS/Average Inv or
Stock Turnover Ratio = COGS/(Inv(beg) + Inv(end)/2)
Since Inv(end) = Inv(beg)+20,000
So substitute Inv(end) in the prior formula:
Stock turnover Ratio = COGS/[(Inv(beg) + Inv(beg)+20,000)/2]
Now substituting the known values, we have:
5 = 320,000/(Inv(beg) + Inv(beg) +20,000/2) then simplifying
5 = 320,000/{(2xInv(beg)) +20,000/2}
We simplify {(2xInv(beg)) +20,000/2} as Inv(beg) + 10,000 so
5 = 320,000/(Inv(beg) +10,000)
Transposing the dividend in the right side to the left we have to multiply it to the other side:
5 x (Inv(beg) +10,000) = 320,000
5Inv(beg) + 50,000 = 320,000
5Inv(beg) = 270,000
Inv(beg) = 54,000

E. Let's go back to the formula in A:
Inv(end) = Inv(beg) + 20,000
Substitute Inv(beg)
Inv(end) = 54,000 + 20,000
Inv(end) = 74,000


III. Finally the current assets, going back to I.
Current Assets = Acid Test Current Assets + Inventory(end)
Current Assets = 90,000 + 74,000
Current Assets = 164,000

Whew!that was a long one, I hope this is correct and this helps.

[jaskaransingh]

M very Thankful to :) thanks a lot yaar...