Problem 4-14 Return on Equity and Quick Ratio Lloyd Inc. has sales of $300,000,

Question

Problem 4-14
Return on Equity and Quick Ratio

Lloyd Inc. has sales of $300,000, a net income of $27,000, and the following balance sheet:

The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2x, without affecting sales or net income.

Cash $46,500    Accounts payable $90,000 Receivables 149,250    Other current liabilities 42,000 Inventories 315,000    Long-term debt 115,500 Net fixed assets 239,250    Common equity 502,500 Total assets $750,000    Total liabilities and equity $750,000

Explanation / Answer

Since inventory is not included in the Quick Ratio, selling the inventory will have no effect on it.


Current ROE = 27,000/300,000
Expected ROE = 27,000/149,250

Current current ratio = 346,500/149,250
Expected current ratio = 1,95,750/1,49,250

Current quick ratio =1,95,750/1,49,250
Expected quick ratio =1,95,750/1,49,250

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.