Current ratio and inventory turnover Answer: b
Jefferson Co. has $2 million in total assets and $3 million in sales. The company has the following balance sheet:
Cash $ 100,000 Accounts payable $ 200,000
Accounts receivable 200,000 Accruals 100,000
Inventories 500,000 Notes payable 200,000
Net fixed assets 1,200,000 Long-term debt 700,000
Common equity 800,000
Total assets $2,000,000 and equity $2,000,000
Jefferson wants to improve its inventory turnover to the industry average of 10.0´. The change is not expected to have an effect on sales.
If successful, the company would use the freed-up cash from the reduction in inventories and use half of it to reduce notes payable and the other half to reduce common equity. If successful, what will be Jefferson’s current ratio?
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