48.Johnson Corp.

had the following financial results for the fiscal 2004 year:

Current ratio  2.00 

Quick ratio  1.25 

Current liabilities  $100,000 

Inventory turnover  12 

Gross profit %  25 

The only current assets are cash, accounts receivable, and inventory. The balance in these accounts has
remained constant throughout the year. Johnson’s net sales for 2004 were: 

A)   $300,000. 
B)   $900,000. 
C)   $1,000,000. 
D)   $1,200,000. 
The correct answer was D)

The 25% GP indicates that the cost of goods sold is 75% of sales. The inventory is derived from the
difference between current ratio and the quick ratio. The current ratio indicates that the current assets are
$200,000 and the quick assets are $125,000. The difference represents the inventory of $75,000. The
inventory turnover is used to obtain cost of goods sold of $900,000. The cost of goods sold is 75% of
sales, indicating that sales are $1,200,000

3.If the company’s net profit margin declines to 0.10 in 2005, what total asset turnover would be needed
in order to maintain the same ROE as in 2004, assuming there is no change in the financial leverage
multiplier? 
A)   2.50. 
B)   1.50. 
C)   3.15. 
D)   0.10. 
The correct answer was C)    

ROE for 2005 can be computed as follows: 0.1 × asset turnover × 1.5 = 0.4725. Hence, desired asset
turnover will be 3.15.