Chapter 5, Problem 9BTN

1.

Summary Introduction

Concept introduction:

Inventory Turnover Ratio: Inventory Turnover Ratio is calculated by dividing the Cost of goods sold by Average inventory. The formula of the Inventory Turnover Ratio is as follows:

  $InventoryTurnoverRatio=\frac{Costofgoodssold}{Averageinventory}$

Note: Average inventory is calculated with the help of following formula:

  $Averageinventory=\frac{(Beginninginventory+Endinginventory)}{2}$

Day’s sales in inventory: Days sales in inventory represent the number of days the inventory waits for the sale. It is calculated by using the following formula:

  $DaySalesinInventory=\frac{Inventory*365}{CostofGoodsSold}$

To calculate: The inventory turnover and days sales in inventory ratio for the company for two years.

Answer to Problem 9BTN

 The inventory turnover and days sales in inventory ratios for the company for two years are as follows:

	Current year	One year prior
Inventory Turnover Ratio	7.04	7.47
Days Sales in inventory	52	49

Explanation of Solution

 The inventory turnover and days sales in inventory ratios for the company for two years are calculated as follows:

Korean won in millions	Current year	One year prior
Cost of Goods Sold (A)	128,278,800	137,696,309
Beginning Inventory (B)	19,134,868	17,747,413
Ending Inventory (C)	17,317,504	19,134,868
Average Inventory (D) = (B+C)/2 =	18,226,186	18,441,141
Inventory Turnover Ratio (E) = A/D =	7.04	7.47
Days Sales in inventory = 365 / E =	52	49

2.

Summary Introduction

Concept introduction:

Inventory Turnover Ratio: Inventory Turnover Ratio is calculated by dividing the Cost of goods sold by average inventory. The formula of the Inventory Turnover Ratio is as follows:

  $InventoryTurnoverRatio=\frac{Costofgoodssold}{Averageinventory}$

Note: Average inventory is calculated with the help of following formula:

  $Averageinventory=\frac{(Beginninginventory+Endinginventory)}{2}$

Day’s sales in inventory: Days sales in inventory represent the number of days the inventory waits for the sale. It is calculated using the following formula:

  $DaySalesinInventory=\frac{Inventory*365}{CostofGoodsSold}$

To indicate: The comment on the findings.

Answer to Problem 9BTN

The efficiency of inventory management has decreased.

Explanation of Solution

The inventory turnover and days sales in inventory ratios for the company for two years are calculated as follows:

Korean won in millions	Current year	One year prior
Cost of Goods Sold (A)	128,278,800	137,696,309
Beginning Inventory (B)	19,134,868	17,747,413
Ending Inventory (C)	17,317,504	19,134,868
Average Inventory (D) = (B+C)/2 =	18,226,186	18,441,141
Inventory Turnover Ratio (E) = A/D =	7.04	7.47
Days Sales in inventory = 365 / E =	52	49

 The inventory turnover has decreased and day’s sales in inventory ratio have increased in the current year and compared with the previous year. It indicates that the efficiency of inventory management has decreased.