Chapter 6, Problem 6.13E

(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. It is calculated by using the following formula:

$\text{Inventory turnover = }\frac{\text{Cost of goods sold}}{\text{Average inventory}}$

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.

$\text{Days' sales in inventory}=\frac{\text{Days in accounting period}}{\text{Inventory turnover}}$

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 2017.

(b)

To determine

To Compute: The current ratio and adjust the LIFO reserve using the 2017 data.

(c)

To determine

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