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Harrods Ltd anticipates it would require an investment of $20,000 in current liability for the
forthcoming year. It has targeted to maintain current ratio at 3:1, turnover to current assets at 5:1,
and acid test ratio at 4:2.
What would be the likely forecast sales turnover and inventory level of Harrods Ltd, based on its
targeted ratios?
a Sales turnover = $120,000; Inventory = $60,000
b Sales turnover = $300,000; Inventory = $20,000
c Sales turnover = $120,000; Inventory = $40,000
d Sales turnover = $300,000; Inventory = $60,000Answer – B
I need your help to find out only the sales turnover using a formula or by any technique.
Thanks a lot,
There are not extra formulae to learn – it is application of the standard formulae (as dealt with in our free notes and the free lectures that go with them) which certainly you must learn!
Current ratio – current assets / current liabilities = 3.
Therefore if the current liabilities are 20,000, then the current assets must be 3 x 20,000 = 60,000.
Turnover / current assets = 5
Therefore since the current assets are 60,000 then the turnover must be 5 x 60,000 = 300,000.
Acid test ratio (quick ratio) = (current assets – inventory) / current liabilities = 4/2 = 2.
Therefore since the current liabilities are 20,000, then current assets – inventory = 2 x 20,000 = 40,000.
We already know that total current assets are 60,000, therefore the inventory must be 60,000 – 40,000 = 20,000.Thanks a lot Mr. John. Really you are god’s gift to us. I was really breaking my head for several days. Thank you so much for your clear and crispy answer.
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