Chapter 5, Problem 1AA

To determine

Balance Sheet:

The balance sheet concludes the assets invested in by the company as well as reports the liabilities and equity taken up thus showing the economic or financial status of the company.

Inventory:

Inventory refers to the stock or goods which will be sold in the near future and thus is an asset for the company. It comprises of the raw materials which are yet to be processed, the stock which is still going through the process of production and it also includes completed products that are ready for sale. Thus inventory is the biggest and the important source of income and profit for the business.

End inventory:

Period end inventory refers to the units remaining at the end of the fiscal year which are yet to be sold.

Current Assets:

It comprises of all the assets which gets converted into cash in less than a year. Example: inventory, other current assets, etcetera.

Inventory Turnover Ratio:

It depicts the fraction of inventory sold or used by the company within a fiscal year. It states a ratio which shows the number of times goods were sold during an accounting period which thereby states the productivity or the efficiency level of the company regarding the inventory which apparently is the biggest asset for the company.

Days’ sales in inventory:

It indicates the days taken up by the company to convert the stock items into actual sales.

1.

Amount of inventories as a part of current assets on September 26, 2015 and on September 27, 2014.

Explanation of Solution

• The ending inventory as a part of the current assets as on September 26, 2015 accounts for $2,349.
• And the ending inventory as a part of the current assets as on September 27, 2014 accounts for $2,111.

2.

To determine

To compute: Inventories as a percentage of total assets on September 26, 2015 and.

September 27, 2014.

Explanation of Solution

Given info,

2015

The ending inventory is $2,349.

Total assets account for $290,479.

2014

The ending inventory is $2,111.

Total assets accounts for $231,839.

Inventory as a percentage of total assets as on September 26, 2015:

Formula to calculate inventory as a percentage of total assets is,

  $Inventoryasapercentageoftotalassets=\left(\frac{Inventory}{Totalassets}\times 100\right)$

Substitute $2,349 for inventory and $290,479 for total assets.

  $\begin{array}{c}Inventoryasapercentageoftotalassets=\left(\frac{\$2,349}{\$290,479}\times 100\right)\\ =0.81\%\end{array}$

Therefore, the inventory as a percentage of total assets as on September 26, 2015 is 0.81%.

Inventory as a percentage of total assets as on September 27, 2014:

Formula to calculate inventory as a percentage of total assets is,

  $Inventoryasapercentageoftotalassets=\left(\frac{Inventory}{Totalassets}\times 100\right)$

Substitute $2,111 for inventory and $231,839 for total assets.

  $\begin{array}{c}Inventoryasapercentageoftotalassets=\left(\frac{\$2,111}{\$231,839}\times 100\right)\\ =0.91\%\end{array}$

Therefore, the inventory as a percentage of total assets as on September 27, 2014 is 0.91%.

3.

To determine

To explain: Relative size of inventories compared to its other types of assets.

Explanation of Solution

• The inventory in both the years accounts for very low amount as compared to other assets of the company.
• Long-term marketable securities comparatively is very high than the inventory.
• Whereas, goodwill and other assets are somewhere amounts near to inventories yet have a higher value in the balance sheet.

4.

To determine

The accounting method used to compute inventory amounts.

Explanation of Solution

The company accounts inventory as per the lower of cost or market (LCM) approach. The notes to statement also mention that the method of inventory valuation used is first in, first out method. The inventory mainly consists of the finished goods.

5.

To determine

To compute: Inventory turnover and days’ sales in inventory for the year ended September 26, 2015.

Explanation of Solution

Given info,

Cost of sales is $140,089.

The ending inventory is $2,349.

A’s inventory turnover:

Computation of the inventory turnover for 2015:

Formula to calculate the inventory turnover is,

  $\text{Inventory}\text{turnover}\text{ratio}=\frac{\text{Cost}\text{of}\text{sales}}{\text{Average}\text{inventory}}$

Substitute $140,089 for cost of sales (given) and $2,230 for average inventory (working notes) in the above formula.

  $\begin{array}{c}\text{Inventory}\text{turnover}\text{ratio}=\frac{\$140,089}{\$2,230}\\ =62.8\text{times}\end{array}$

Thus, the inventory turnover results to 62.8 times.

Working Notes:

Calculation of the average inventory,

  $\begin{array}{c}\text{Average}\text{inventory}=\frac{\left(\text{Beginning}\text{inventory}+\text{Ending}\text{inventory}\right)}{2}\\ =\frac{\left(\$2,111+\$2,349\right)}{2}\\ =\frac{\$4,460}{2}\\ =\$2,230\end{array}$

A’s days’ sales in inventory:

Formula to calculate the days’ sales in inventory is,

  $\text{Days'}\text{sales}\text{in}\text{inventory}\text{=}\left(\frac{\text{Ending}\text{inventory}}{\text{Cost}\text{of}\text{sales}}\right)\times 365$

Substitute $2,349 for ending inventory (given) and $140,089 for cost of sales (given) in the above formula.

  $\begin{array}{c}\text{Days'}\text{sales}\text{in}\text{inventory}\text{=}\left(\frac{\$2,349}{\$140,089}\right)\times 365\\ =0.0167\times 365\\ =6.12\text{days}\end{array}$

Thus, the days’ sales in inventory accounts for 6.12 days.

6.

To determine

Information for the year ended September 26, 2015.

Explanation of Solution

Given info,

2016

The ending inventory is $2,132.

The total assets are $321,686.

The cost of sales is $131,376.

2017

The ending inventory is $4,855.

The total assets are $375,319

The cost of sales is $141,048.

Year 2016

1.

Ending inventory

Ending inventory as on September 24, 2016 amounts to $2,132.

2.

Inventory as a percentage of total assets as on September 24, 2016:

Formula to calculate inventory as a percentage of total assets is,

  $Inventoryasapercentageoftotalassets=\left(\frac{Inventory}{Totalassets}\times 100\right)$

Substitute $2,132 for inventory and $321,686 for total assets.

  $\begin{array}{c}Inventoryasapercentageoftotalassets=\left(\frac{\$2,132}{\$321,686}\times 100\right)\\ =0.66\%\end{array}$

Therefore, the inventory as a percentage of total assets as on September 24, 2016 is 0.66%.

3.

Inventory relative size compared to other assets

• The inventory in both the years accounts for very low amount as compared to other assets of the company.
• Long-term marketable securities comparatively is very high than the inventory.
• Whereas goodwill and other assets are somewhere amounts near to inventories yet have a higher value in the balance sheet.

4.

Method of inventory valuation:

• The company accounts inventory as per the lower of cost or market (LCM) approach.
• The notes to statement also mention that the method of inventory valuation used is first in, first out method. The inventory mainly consists of the finished goods.

5.

A’s inventory turnover:

Computation of the inventory turnover for 2016:

Formula to calculate the inventory turnover is,

  $\text{Inventory}\text{turnover}\text{ratio}=\frac{\text{Cost}\text{of}\text{sales}}{\text{Average}\text{inventory}}$

Substitute $131,376 for cost of sales (given) and $2,240.5 for average inventory (working notes) in the above formula.

  $\begin{array}{c}\text{Inventory}\text{turnover}\text{ratio}=\frac{\$131,376}{\$2,240.5}\\ =58.64\text{times}\end{array}$

Thus, the inventory turnover results to 58.64 times.

Working notes:

Calculation of the average inventory,

  $\begin{array}{c}\text{Average}\text{inventory}=\frac{\left(\text{Beginning}\text{inventory}+\text{Ending}\text{inventory}\right)}{2}\\ =\frac{\left(\$2,349+\$2,132\right)}{2}\\ =\frac{\$4,481}{2}\\ =\$2,240.5\end{array}$

A’s days’ sales in inventory:

Formula to calculate the days’ sales in inventory is,

  $\text{Days'}\text{sales}\text{in}\text{inventory}\text{=}\left(\frac{\text{Ending}\text{inventory}}{\text{Cost}\text{of}\text{sales}}\right)\times 365$

Substitute $2,132 for ending inventory (given) and $131,376 for cost of sales (given) in the above formula.

  $\begin{array}{c}\text{Days'}\text{sales}\text{in}\text{inventory}\text{=}\left(\frac{\$2,132}{\$131,376}\right)\times 365\\ =0.0162\times 365\\ =5.92\text{days}\end{array}$

Thus, the days’ sales in inventory accounts for 5.92 days.

Year 2017

1.

Ending inventory

Ending inventory as on September 30, 2017 amounts to $4,855.

2.

Inventory as a percentage of total assets as on September 30, 2017:

Formula to calculate inventory as a percentage of total assets is,

  $\left(\begin{array}{l}Inventoryasapercentageof\\ totalassets\end{array}\right)=\left(\frac{Inventory}{Totalassets}\times 100\right)$

Substitute $4,885 for inventory and $375,319 for total assets.

  $\begin{array}{c}\left(\begin{array}{l}Inventoryasapercentageof\\ totalassets\end{array}\right)=\left(\frac{\$4,855}{\$375,319}\times 100\right)\\ =1.29\%\end{array}$

Therefore, the inventory as a percentage of total assets as on September 30, 2017 is 1.3%.

3.

Inventory relative size compared to other assets

The inventory in both the years accounts for low amount as compared to other assets of the company but has increased comparatively and is more than the intangible assets. Whereas goodwill and other assets are somewhere amounts near to inventories yet have a higher value in the balance sheet.

4.

Method of inventory valuation:

The company accounts inventory as per the lower of cost or market (LCM) approach. The notes to statement also mention that the method of inventory valuation used is first in, first out method. The inventory mainly consists of the finished goods.

5.

A’s inventory turnover:

Computation of the inventory turnover for 2017:

Formula to calculate the inventory turnover is,

  $\text{Inventory}\text{turnover}\text{ratio}=\frac{\text{Cost}\text{of}\text{sales}}{\text{Average}\text{inventory}}$

Substitute $141,048 for cost of sales (given) and $3,493.5 for average inventory (working notes) in the above formula.

  $\begin{array}{c}\text{Inventory}\text{turnover}\text{ratio}=\frac{\$141,084}{\$3493.5}\\ =40.3\text{times}\end{array}$

Thus, the inventory turnover results to 40.3 times.

Working Notes:

1. Calculation of the average inventory:

  $\begin{array}{c}\text{Average}\text{inventory}=\frac{\left(\text{Beginning}\text{inventory}+\text{Ending}\text{inventory}\right)}{2}\\ =\frac{\left(\$2,132+\$4,855\right)}{2}\\ =\frac{\$6,987}{2}\\ =\$3,493.5\end{array}$

A’s days’ sales in inventory:

Computation of the days’ sales in inventory for 2017:

Formula to calculate the days’ sales in inventory is,

  $\text{Days'}\text{sales}\text{in}\text{inventory}\text{=}\left(\frac{\text{Ending}\text{inventory}}{\text{Cost}\text{of}\text{sales}}\right)\times 365$

Substitute $4,855 for ending inventory (given) and $141,048 for cost of sales (given) in the above formula.

  $\begin{array}{c}\text{Days'}\text{sales}\text{in}\text{inventory}\text{=}\left(\frac{\$4,855}{\$141,048}\right)\times 365\\ =0.0344\times 365\\ =12.56\text{days}\end{array}$

Thus, the days’ sales in inventory accounts for 12.56 days.

Observation:

• Inventory as a percentage of total assets has fallen over the years though in the year 2017 it has shown a rise trend.
• In the year 2017 the company has been most efficient as per the inventory turnover when compared to the previous years.
• Whereas in case of days’ sales in inventory the results suggests that the company in the year 2017 held inventory in store for a bit longer time whereas it is least in the year 2016.