Chapter 5, Problem 9BTN

1.

To determine

Compute the inventory turnover and days’ sales inventory for each company for the most recent years shown.

Explanation of Solution

Inventory turnover:

This is the ratio which analyzes the number of times inventory is sold during the period. This ratio gauges the efficacy of inventory management. Larger the ratio, more efficient will be the inventory management.

Calculate inventory ratio for Company A’s current year as follows:

$\begin{array}{c}\text{Inventory turnover = }\frac{\text{Cost of}\text{Goods sold }}{\text{Average Inventory}}\\ =\frac{\$140,089}{\left(\$2,349+\$2,111\right)÷2}\\ =62.8\text{Times}\end{array}$

Calculate inventory ratio for Company A’s one year prior as follows:

$\begin{array}{c}\text{Inventory turnover = }\frac{\text{Cost of}\text{Goods sold }}{\text{Average Inventory}}\\ =\frac{\$112,258}{\left(\$2,111+\$1,764\right)÷2}\\ =57.9\text{Times}\end{array}$

Calculate inventory turnover ratio for Company M’s current year as follows:

$\begin{array}{c}\text{Inventory turnover = }\frac{\text{Cost of}\text{Goods sold }}{\text{Average Inventory}}\\ =\frac{\$33,038}{\left(\$2,902+\$2,660\right)÷2}\\ =11.9\text{Times}\end{array}$

Calculate inventory turnover ratio for Company M’s one year prior as follows:

$\begin{array}{c}\text{Inventory turnover = }\frac{\text{Cost of}\text{Goods sold }}{\text{Average Inventory}}\\ =\frac{\$27,078}{\left(\$2,660+\$1,938\right)÷2}\\ =11.8\text{Times}\end{array}$

Calculate inventory ratio for Company S’s current year as follows:

$\begin{array}{c}\text{Inventory turnover = }\frac{\text{Cost of}\text{Goods sold }}{\text{Average Inventory}}\\ =\frac{\$123,482,118}{\left(\$18,811,794+\$17,317,504\right)÷2}\\ =6.84\text{Times}\end{array}$

Calculate inventory ratio for Company S’s one year prior as follows:

$\begin{array}{c}\text{Inventory turnover = }\frac{\text{Cost of}\text{Goods sold }}{\text{Average Inventory}}\\ =\frac{\$128,278,800}{\left(\$17,317,504+\$19,134,868\right)÷2}\\ =7.04\text{Times}\end{array}$

Days’ sales 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.

Calculate days’ sales inventory for the Company A’s current year as follows:

$\begin{array}{c}\text{Days' sales inventory = }\frac{\text{Ending inventory}}{\text{Cost of goods sold}}\times 365\\ =\frac{\$2,349}{\$140,089}\times 365\\ =6.12\text{Days}\end{array}$

Calculate days’ sales inventory for the company A’s one year prior as follows:

$\begin{array}{c}\text{Days' sales inventory = }\frac{\text{Ending inventory}}{\text{Cost of goods sold}}\times 365\\ =\frac{\$2,111}{\$112,258}\times 365\\ =6.86\text{Days}\end{array}$

Calculate days’ sales inventory for the Company M’s current year as follows:

$\begin{array}{c}\text{Days' sales inventory = }\frac{\text{Ending inventory}}{\text{Cost of goods sold}}\times 365\\ =\frac{\$2,902}{\$33,038}\times 365\\ =32.06\text{Days}\end{array}$

Calculate days’ sales inventory for the Company M’s one year prior as follows:

$\begin{array}{c}\text{Days' sales inventory = }\frac{\text{Ending inventory}}{\text{Cost of goods sold}}\times 365\\ =\frac{\$2,660}{\$27,078}\times 365\\ =35.86\text{Days}\end{array}$

Calculate days’ sales inventory for the Company S’s current year as follows:

$\begin{array}{c}\text{Days' sales inventory = }\frac{\text{Ending inventory}}{\text{Cost of goods sold}}\times 365\\ =\frac{\$18,811,794}{\$123,482,118}\times 365\\ =55.61\text{Days}\end{array}$

Calculate days’ sales inventory for the Company S’s one year prior as follows:

$\begin{array}{c}\text{Days' sales inventory = }\frac{\text{Ending inventory}}{\text{Cost of goods sold}}\times 365\\ =\frac{\$17,317,504}{\$128,278,800}\times 365\\ =49.27\text{Days}\end{array}$

Note: For the values of Company S and Company M refer the text book (Question 2BTN).

2.

To determine

Comment and interpret your findings from parts 1.

Explanation of Solution

Interpret and Comment:

• Company A’s inventory turnover ratio is more efficient than Company M.
• Company A’s days’ sales inventory is fewer than company M.
• However Company S has the lowest inventory turnover ratio and highest days’ sales inventory for both years.
• From the above calculation it is clear that, the inventory turnover ratio of Company A and M is more efficient than Company S. This is because Company S exhibited a slightly decline in the inventory management for the current year from the prior year.