The balance sheet and income statement for Johnson and Breakwater is presented below

Question

Balance Sheet (000)
Cash $500
Accounts receivable 1,500
Inventories 500
Current assets 2,500
Net fixed assets 5,000
Total Assets 7,500
Accounts payable 1,200
Bank note 300
Total current liabilities 1,500
long-term debt 4,000
Common stock 300
Retained earnings 1,700
Total liabilities and owners' equity $7,500
Income Statement (000)
Net sales $8,500
Cost of goods sold (3,400)
Gross profit 5,100
Operating expenses (2,900)
Net operating income 2,200
Interest expense (580)
Earnings before taxes 1,620
Income tax (34%) (551)
Net income $1,069
a. Compute the following ratios: Current ratio, Acid test ratio, Debt ratio, Total asset turnover, Operating
profit margin, Return on total investments, Times interest earned, Inventory turnover.
b. All other things equal, compute the dollar amount of sales needed to achieve an 18% return on total assets
for the coming year.
c. Given Johnson's inventory turnover ratio, find a way of computing the current level of inventory given this
ratio and assuming the current level of inventories is unknown. Set up but do not solve.

Answer 1

a. Current ratio 0.67
Acid test ratio 1.33
Debt ratio 0.73
Total asset turnover 1.13
Operating profit margin 0.26
Return on total assets 0.14
Times interest earned 3.79
Inventory turnover 6.80
b. .18 = .13 × sales/7500
1.3846 = sales/7500
sales = $10,384,620
c. 6.8 = 3400/inventories