
(a)
Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:
To determine: the inventory turnover for Company T and Company A
(a)

Answer to Problem 6.1MAD
Explanation of Solution
The inventory turnover ratio for Company T is calculated as follows:
Working notes:
The average inventory is calculated as follows:
The inventory turnover ratio for Company A is calculated as follows:
Working notes:
The average inventory is calculated as follows:
The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory during the period. The average inventory is calculating by dividing beginning inventory and ending inventory by 2. The inventory turnover ratio is an important measure as to how efficient is the management is good at managing inventory and achieving sales from it.
Therefore, the inventory turnover of Company T is 6.2 Times & the inventory turnover of Company A is 7.7 Times.
(b)
Days’ sales in inventory: Days’ sales in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. The formula to calculate the days’ sales in inventory ratio is as follows:
To determine: the Days’ sales in inventory ratio Company T and Company A.
(b)

Answer to Problem 6.1MAD
Explanation of Solution
The Days’ sale in inventory ratio for Company T is calculated as follows:
The Days’ sale in inventory ratio for Company A is calculated as follows:
The Days’ sales in inventory ratio are calculated by dividing days in accounting period by inventory turnover ratio. The Days’ sale in inventory ratio is an important measure to know how long the company is holding the inventory before selling when compared to its peers.
Therefore, the Days’ sales in inventory of Company T are 58.8 days, & the Days’ sales in inventory of Company A is 47.4 days.
(c)
Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:
To state: the company that has better inventory efficiency.
(c)

Answer to Problem 6.1MAD
Explanation of Solution
The company A has higher inventory turnover ratio of 7.7 and lesser number of days’ sales in inventory of 47.4 days when compared to company T’s inventory turnover ratio of 6.2 and number of days’ sales in inventory of 58.8 days.
(d)
Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:
Days’ sales in inventory: Days’ sales in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. The formula to calculate the days’ sales in inventory ratio is as follows:
To explain: the difference in inventory efficiency between two companies.
(d)

Explanation of Solution
The main difference in the inventory efficiency between both the companies is that merchandising strategy followed. The Company A uses internet as medium for selling goods and direct shipping of merchandise inventory is not handled as company A’s inventory, whereas company T uses traditional retail store method which makes them to stock more level of inventory in retail outlet. The company T’s strategy requires a significant investment in inventory as it can be seen in its inventory turnover and number of days’ sales in inventory
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Chapter 6 Solutions
Corporate Financial Accounting
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