Selected data from Sheridan Corporation's year-end financial statements are presented below.The difference between average and ending inventory is immaterial.
$\begin{array}{|l|r|}
\hline \text { Current Ratio } & 2.0 \
\hline \text { Acid-Test Ratio } & 1.5 \
\hline \text { Current Liabilities } & \$ 120,000 \
\hline \text { Lnventory Turnover } & 8 \text { times } \
\hline \text { Gross Profit Margin } & 40 \% \
\hline \text { Prepaid Expenses } & \$ 0 \
\hline
\end{array}$
What were Sheridan's sales for the year?
A) $240,000.
B) $480,000.
C) $800,000.
D) $1,200,000.

Question

Quizplus · Accepted Answer

Given the inventory turnover is 8 times and the difference between average and ending inventory is immaterial, we can calculate the cost of goods sold (COGS) by finding the inventory amount first. The current ratio is 2.0, meaning current assets are twice the current liabilities, so current assets = 2 * $120,000 = $240,000. The acid-test ratio (or quick ratio) is 1.5, calculated without inventory, so quick assets = 1.5 * $120,000 = $180,000. Since prepaid expenses are $0, the difference between current assets and quick assets gives us the inventory value, which is $240,000 - $180,000 = $60,000. With an inventory turnover of 8 times, COGS = 8 * $60,000 = $480,000. Given the gross profit margin is 40%, we can calculate sales as COGS / (1 - Gross Profit Margin) = $480,000 / (1 - 0.4) = $480,000 / 0.6 = $800,000.

Selected Data from Sheridan Corporation's Year-End Financial Statements Are Presented