Chapter 6, Problem 58E

Analyzing Inventory

The recent financial statements of McLelland Clothing Inc. include the following data:

Required:

1. Calculate McLelland’s gross profit ratio (rounded to two decimal places), inventory turnover ratio (rounded to three decimal places), and the average days to sell inventory (assume a 365-day year and round to two decimal places) using the FIFO inventory costing method. Be sure to explain what each ratio means.

2. Calculate McLelland’s gross profit ratio (rounded to two decimal places), inventory turnover ratio (rounded to three decimal places), and the average days to sell inventory (assume a 365-day year and round to two decimal places) using the LIFO inventory costing method. Be sure to explain what each ratio means.

3. CONCEPTUAL CONNECTION Which ratios-the ones computed using FIFO or LIFO inventory values-provide the better indicator of how successful McLelland was at managing and controlling its inventory?