Driving Inventory Balance
Sometimes a business doesn’t have exact inventory balance or inventory level at a certain period of time. In such cases the inventory balance can be derived by using current liabilities, current asset and the quick ratio kind of financial figures. While calculating the quick ratio and the current ratio we came to know that the denominator require to calculate both the ratios are exactly the same and numerator are also same expect the inventory balance that is not used in calculating the quick ratio.
In order to calculate the inventory by using the current assets, current liabilities and quick ratio the simplest thing to be done is to multiply the quick ratio figure with the current liability of the business. The figure that comes after multiplying the quick ratio with current liabilities is then subtracted from the current assets to get the ultimate inventory level.
For example let’s assume that the ABC company has the current assets of 1.5 million dollars and the current liabilities of the company are 500,000 dollars where as the quick ratio is 0.75:1. The figure of current liabilities that is 500,000 is multiplied with the quick ratio of 0.75 and the figure that is derived is 375,000 dollars. This amount is the non inventory value of the current assets of the business. In order to calculate the inventory level the figure is subtracted from the current assets figure of the company ABC.
Now the inventory level can be calculated as
Inventory Level= 1,500,000 – 375,000
Inventory Level = $1,125,000
Other Related Accounting Articles:
- Average Inventory Calculation
- Reorder Level
- Net Realizable Value
- Inventory Turnover Ratio or Stock Turnover Ratio (ITR)
- Dollar Value LIFO Method
- Maximum Level or Maximum Limit of Stock
- Danger Level of Materials or Inventory Stock
- Minimum Limit or Minimum Level of Stock
- Beginning Inventory Explained
- The Gross Profit Method of Inventory Accounting
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