Question

1. what is the current ratio and what does the final number specifically tell managers or investors?

2. what is the inventory turnover and what does the final number tell managers or investors?

3. what is the return on assets and what does the final number tell managers or investors?

EXHIBIT 8.1 The Balance Sheet for Bigbux Bigbux, Inc. Balance Sheet December 31, 201X Assote (Resources owned by the trm) ASSETS Current Assets Cash $188.000 Accounts receivable 187,000 396.000 771,000 Inventory Total current assets Equals Plant, Property and Equipment Less Accumulated depreciation Net plant, property and equipment Total Assets 997,000 -64,000 $933 000 $.704.000 Liabilities (What the fi owes to outsiders) LIABILITIES Current Liabilities Accounts payable Wages payable Total curnent lablities Long-term Liablities Long-tem loan Total Liabilities $220,000 300.000 520.000 Phus The balance "balances 380.000 reflecting t eqquality expre in the accouur equation $900.000 Owners STOCKHOLDERS EQUITY (or Stockholders) Equity (he claims owDAE have on their Srm's ssets) Common Equity Common stock Retained eamings Total Stockholders Equity $300,000 504.000 S804 000 Total Liabilities and Stockholders Equity $704,000 Notes EIO

Answer 1

Current ratio= current asset/ current liability

Current assets:

Cash = $ 188000

Account receivable = $ 187000

Inventory = $ 396000

Total = 771000

Current liabilities:

Account payable = $ 771000

Wage payable = 300000

Total = 520000

Current ratio = $ 771000/$520000

= 1.48 : 1

The current ratio indicates the firms capacity to pay its current liabilities in time. It is an index of the strength of working capital . Current ratio is an important ration for analysing the liquidity position or short term financial position of a firm . The current ratio shows that for every one dollar one of current liabilities . There are current assets worth $ 1.48 .Hence, the firm will not find much difficulty in meeting its current liabilities.However, the current ratio is just below the standard.

2)

Inventory turnover ratio = cost of goods sold / average stock

Cost of goods sold = 550000

Average stock = opening stock + closing stock /2

Here opening stock is not given in the question. Closing stock may be used as average stock .

Inventory turnover ratio = 550000/396000

= 1.39 times

This indicates that tge firms stock is turnover or converted into sales only 1.38 times on an average during the accounting period t. The inventory policy is poor

3)

Return on asset= net income$/Assets

=101000/704000

= .14 times

It shows how many dollars of earning the derive from each dollar of assets they control.