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Over the past year, M.D. Ryngaert & Co. had an increase in its current ratio and...

Over the past year, M.D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed assets turnover ratio remained constant. What balance sheet accounts must have changed to produce the indicated changes?

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Answer #1

Current Ratio = Current Assets/Current Liabilities

Total Assets Turnover Ratio = Sales/Total Assets

Total Assets turnover ratio has declined, but sales are constant. It means total assets have increased.

Fixed Assets turnover ratio = Sales/Fixed Assets

Since this ratio is constant and sales are constant, it implies fixed assets are constant. Hence, there is an increase in current assets

cash and cash equivalents and Days in Sales outstanding are constant. It means cash and debtors are constant.

Hence, other current assets such as inventory, prepaid expenses must have increased.

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