Chapter 15, Problem 15.7SE

Requirement 1

To determine

Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Formula:

$\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}$

Days’ sales in inventory: Days’ sales in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them.

Formula:

$\text{Days' sales in inventory}=\frac{\text{Days in accounting period}}{\text{Inventory turnover}}$

Gross profit ratio: Gross profit ratio is used to estimate the gross profit to the net sales revenue. It is represented in percentage.

Formula:

$\text{Gross profit percentage}=\frac{\text{Net sales}-\text{Cost of goods sold}\left(\text{Gross profit}\right)}{\text{Net sales}}\times 100$

Days’ sales in receivables: Days’ sales in receivables is used to determine the number of days a particular company takes to collect its accounts receivables.

Formula:

$\text{Days' sales in receivables}=\frac{\text{Days in accounting period}}{\text{Accounts receivables turnover}}$

To compute: The inventory turnover, days’ sales in inventory, and gross profit percentage

Requirement 2

To determine

To compute: The inventory turnover, days’ sales in inventory, and gross profit percentage

Requirement 3

To determine

To infer: Companies’ ability to sell inventory and collect receivables.