Problem 4-14 Return on Equity and Quick Ratio Lloyd Inc. has sales of $200,000,
ID: 2697354 • Letter: P
Question
Problem 4-14
Return on Equity and Quick Ratio
Lloyd Inc. has sales of $200,000, a net income of $14,000, 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, 2.5x, without affecting sales or net income.
Cash $27,840 Accounts payable $31,360 Receivables 55,040 Other current liabilities 9,600 Inventories 131,200 Long-term debt 61,120 Net fixed assets 105,920 Common equity 217,920 Total assets $320,000 Total liabilities and equity $320,000
Explanation / Answer
ANSWER
Since inventory is not included in the Quick Ratio, selling the inventory will have no effect on it.
Current ROE = 15,000/200,000
Expected ROE = 15,000/50,000
Current current ratio = 210,000/50,000
Expected current ratio = 60,000/50,000
Current quick ratio = 60,000/50,000
Expected quick ratio = 60,000/50,000
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