Hi pelaod!
The best way to solve this problem would be to "fill in the blanks" in
the balance sheet of this firm using the information given to you
through the ratios. Let's see what information you have:
Current Ratio = Current Assets / Current Liabilities = 3.1
Quick Ratio = (Current Assets - Inventories) / Curr. Liabilities = 2.2
Invent. Turnover Ratio = Cost Of Goods Sold / Inventory = 7.1
Debt ratio = Total Debt / Total Assets = 0.28
Cost of Goods Sold = 0.7 * Sales
Long Term Debt = 0
Total Assets = $14,370,900
Now, notice that you can plug the value of Total Assets into the Debt
Ratio in order to get the Total Debt. So we have:
Total Debt = 0.28 * 14,3730,900 = $4,023,852
Since long-term debt is zero, then we have that (assuming that all
liabilities are "debts"):
Short-term debt = Current Liabilities = $4,023,852
Checking the information you have, notice that you can use the Current
Liabilities value and the Current Ratio in order to calculate the
Current Assets:
Current Assets = 3.1 * Current Liabilities = $12,473,941.20
Now, given that we know the value of the Current Assets and Current
Liabilities, we can use the Quick Ratio to find the value of
Inventories. This one is a bit "trickier" than the previous one, but
it's quite simple nevertheless:
Current Assets - Inventories = 2.2 * Current Liabilities
12,473,941.20 - Inventories = 2.2 * 4,023,852
12,473,941.20 - Inventories = 8,852,474.40
Inventories = 12,473,941.20 - 8,852,474.40
Inventories = $3,621,466.80
We can now use the Inventories figure in order to find the Cost Of
Goods Sold (CGS) figure, using the Inventory Turnover Ratio:
CGS = 7.1 * Inventories = $25,712,414.28
And, at long last, using the CGS and the fact that CGS reprents 70% of
Sales, we can find the Sales figure:
CGS = 0.7 * Sales
25,712,414.28 = 0.7 * Sales
Sales = 25,712,414.28/0.7
Sales = $36,732,020.40
which matches the answer you supplied.
I hope this helps! If you have any questions regarding my answer,
please don't hesitate to request a clarification. Otherwise I await
your rating and final comments.
Best wishes!
elmarto |