Question

Sexton Corp. has current liabilities of $510,000, a quick ratio of .93, inventory turnover of 6.9, and a current ratio of 1.5. What is the cost of goods sold for the company?

Answer 1

Answer:

The cost of goods sold for the company is $2,005,830.

Explanation:

This can be calculated from the available information using the following steps:

Step 1: Calculation of Current Assets

To do this, we use the current ratio formula as follows:

Current ratio = Current Assets / Current Liabilities

Substituting the values in the question into the equation above and solve for Current Assets, we have:

1.5 = Current Assets / $510,000

Current Assets = $510,000 * 1.5 = $765,000

Step 2: Calculation of Inventory

To do this, we use the Quick Ratio formula as follows:

Quick ratio = (Current Assets - Inventory) / Current Liabilities

Substituting the values in the question and from Step 1 into the equation above and solve for Inventory, we have:

0.93 = ($765,000 - Inventory) / $510,000

0.93 * $510,000 = $765,000 - Inventory

$474,300 = $765,000 - Inventory

$474,300 + Inventory = $765,000

Inventory = $765,000 - 474,300 = $290,700

Note that this inventory of $290,700 is the ending inventory.

Step 3: Calculation of Cost of Goods Sold

To do this, we use the Inventory Turnover formula as follows:

Inventory turnover = Cost of goods sold / Average Inventory

Note that average Average Inventory is the addition of the beginning and closing inventory divided by 2. But since the beginning inventory is not available, the practice is to use the ending inventory in place of the average inventory. This is what we do here below.

Substituting the values in the question and from Step 2 into the equation above and solve for Cost of goods sold, we have:

6.9 = Cost of goods sold / $290,700

Cost of goods sold = 6.9 * $290,7000 = $2,005,830

Therefore, the cost of goods sold for the company is $2,005,830.