Chapter 6, Problem 5BTN

To determine

Concept Introduction:

Ratio Analysis:

Ratio analysis is a study of several key metrics of a company based on the data presented in its' financial statements with an objective to evaluate the financial health of a company.

It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

Inventory turnover − A measure of the relation between the turnover and inventory measured in number of times.

It seeks to measure the relation of the inventory rolled over in proportion to the total turnover and is an indicator of how much of the inventory is fast moving in relation to the total turnover.

  $\text{Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory}$

Days Sale in Inventory − A measure of the total outstanding collections for credit sales in terms of inventory.

It is calculated to understand how many days sales in terms of inventory are available to the company.

  $\text{Days' Sale In Inventory = 365 / Inventory Turnover Ratio}$

Requirement 1:

Inventory Turnover Ratio and Days Sale in Inventory under Current and Proposed Conditions.

To determine

Concept Introduction:

Ratio Analysis:

Ratio analysis is a study of several key metrics of a company based on the data presented in its' financial statements with an objective to evaluate the financial health of a company.

It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

Inventory turnover − A measure of the relation between the turnover and inventory measured in number of times.

It seeks to measure the relation of the inventory rolled over in proportion to the total turnover and is an indicator of how much of the inventory is fast moving in relation to the total turnover.

  $\text{Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory}$

Days Sale in Inventory − A measure of the total outstanding collections for credit sales in terms of inventory.

It is calculated to understand how many days sales in terms of inventory are available to the company.

  $\text{Days' Sale In Inventory = 365 / Inventory Turnover Ratio}$

Requirement 2:

Comment on the proposal to reduce inventory.