Principles of Finance

[Kiwi Lover]

Hi All,

I just took the Thomas Edison 20-question mock exam for Principles of Finance. I only got two wrong....I'm happy with that.

One of my wrong answers was a silly mistake. But I can't figure out the reasoning behind the other question I got wrong.

Maybe an accounting/math/finance guru can help me understand how TESC came up with the answer they did.

Here's the question:

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A firm has a current ratio of 2.4, a quick ratio of 1.5, an inventory turnover of 6 times, and current liabilities of $600,000. What is the firm's level of sales?

a. $1,420,000
b. $1,960,000
c. $2,160,000
d. $3,240,000 <---- Correct Answer
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I understand each of the individual elements contained in the question. But I can't figure out how to put it all together to find the "level of sales".

Can anyone help?

Snazz,

First of all, there wasn't one question on the Finance exam like the one you've listed, but I'll list out how I would have come up with the answer anyway. It's definitely a step-by-step process to come up with the right answer! Here goes:

1. First you need to compute what the assets are. Current ratio is 2.4, and current ratio is current assets divided by current liabilities. They said current liabilities were $600,000, so to get current assets I multiplied the $600,000 times 2.4. So assets = $1,440,000.

2. Now that you know what the assets equal, you can figure out what the inventory number is. Quick ratio is 1.5, and quick ratio is current assets minus inventory divided by current liabilities. We know that current assets = $1,440,000 and current liabilities = $600,000. So we multiply $600,000 times 1.5 (the quick ratio) to equal $900,000. Then deduct this number from the $1,440,000 in assets to equal the difference of $540,000, which is your inventory number.

3. If inventory is $540,000 and inventory turnover is 6 times, then $540,000 times 6 equals $3,240,000 in sales.

I hope that makes sense!! hilarious