Question #57745

Creative Technologies Corp. has the following information:
Annual sales RM1,200,000
Current liabilities RM375,000
Days sales outstanding (DSO) (365-day year) 40
Inventory Turnover ratio 4.8
Current ratio 1.2
The company’s current assets consist of cash, inventories, and accounts receivable.
How much cash does the company have on its balance sheet?

Expert's answer

By definition, Current Ratio, DSO, ITR are:

Current Ratio = Current Assets / Current Liabilities

therefore

Current Assets = Current Liabilities * Current Ratio = RM375,000 * 1.2 = RM450,000

Days Sales Outstanding = (Accounts Receivable / Annual Sales) * 365

therefore

Accounts Receivable = DSO * Annual Sales / 365 = 40 * RM1,200,000 / 365 = RM131,507

Inventory Turnover Ratio = Annual Sales / Average Inventory

therefore

Average Inventory = Annual Sales / Inventory Turnover Ratio = RM1,200,000 / 4.8 = RM250,000

According to the assignment:

Current Assets = Cash + Inventories + Accounts Receivable

therefore

Cash = Current Assets - Inventories - Account Receivable = RM450,000 - RM250,000 - RM131,507 = RM68,493

The answer is:

The company has RM68,493 cash on its balance sheet

Current Ratio = Current Assets / Current Liabilities

therefore

Current Assets = Current Liabilities * Current Ratio = RM375,000 * 1.2 = RM450,000

Days Sales Outstanding = (Accounts Receivable / Annual Sales) * 365

therefore

Accounts Receivable = DSO * Annual Sales / 365 = 40 * RM1,200,000 / 365 = RM131,507

Inventory Turnover Ratio = Annual Sales / Average Inventory

therefore

Average Inventory = Annual Sales / Inventory Turnover Ratio = RM1,200,000 / 4.8 = RM250,000

According to the assignment:

Current Assets = Cash + Inventories + Accounts Receivable

therefore

Cash = Current Assets - Inventories - Account Receivable = RM450,000 - RM250,000 - RM131,507 = RM68,493

The answer is:

The company has RM68,493 cash on its balance sheet

## Comments

Assignment Expert11.05.16, 15:27Dear Faid Al Buraihi,

You're welcome. We are glad to be helpful.

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Faid Al Buraihi11.05.16, 10:27That is really very helpful.... many thanks

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