Inventory turnover ratio : This is a financial measure that is used to evaluate as to how many times a company sells or uses its inventory during an accounting period. Formula for inventory turnover ratio: Inventory turnover = Cost of goods sold Average inventory Days in inventory: Days in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. Formula for days in inventory ratio: Days in inventory = Days in accounting period Inventory turnover LIFO Reserve: It is a contra inventory account that shows the difference between the inventory cost under FIFO and inventory cost under LIFO. This account is recorded when a company uses FIFO method for its inventory valuation but uses LIFO method for financial reporting. To Compute: The inventory turnover and days in inventory of Company D for 2014.

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Chapter 6, Problem 6.11E

(a)

To determine

Inventory turnover ratio: This is a financial measure that is used to evaluate as to how many times a company sells or uses its inventory during an accounting period.

Formula for inventory turnover ratio:

Inventory turnover = Cost of goods soldAverage inventory

Days in inventory: Days in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them.

Formula for days in inventory ratio:

Days in inventory=Days in accounting periodInventory turnover

LIFO Reserve: It is a contra inventory account that shows the difference between the inventory cost under FIFO and inventory cost under LIFO. This account is recorded when a company uses FIFO method for its inventory valuation but uses LIFO method for financial reporting.

To Compute: The inventory turnover and days in inventory of Company D for 2014.

(b)

To determine

To compute: The current ratio and adjust the LIFO reserve using the 2014 data.

(c)

To determine

To comment: The effect of ignoring the LIFO reserve affects the evaluation of Company D’s liquidity.

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