
(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:
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 inventory turnover for Company K, Company S and Company W
(a)

Answer to Problem 6.21EX
- The inventory turnover ratio for Company K is calculated is calculated as follows:
Working notes:
The average inventory is calculated as follows:
The inventory turnover ratio for Company S is calculated is calculated as follows:
Working notes:
The average inventory is calculated as follows:
The inventory turnover ratio for Company W is calculated is calculated as follows:
Working notes:
The average inventory is calculated as follows:
Explanation of Solution
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.
The inventory turnover of Company K is 14.2 Times, the inventory turnover of Company S is 12.5 Times & the inventory turnover of Company W is 32.9 Times.
(b)
To interpret: the above calculated ratios.
(b)

Explanation of Solution
The inventory turnover ratio and number of days’ sales in inventory of Company K and Company S are relatively same. But Company W has a higher inventory turnover ratio and lower number of days’ sales in inventory than the other two companies. Therefore, Company W is efficient in managing inventory than Company K and Company S.
(c)
The amount of cash flow that would have been generated if Company K had Company W’s number of day’s sales in inventory.
(c)

Explanation of Solution
The ending inventory (when Company K had Company W’s number of day’s sales in inventory) is determined as follows:
The additional cash flow (in millions) is determined as follows:
Actual average inventory | $5,040.0 |
Less: Hypothetical average inventory | 2,154.9 |
Positive cash flow potential | $2,885.1 |
Table (1)
Therefore, $2,155 is the amount of cash flow that would have been generated.
Want to see more full solutions like this?
Chapter 6 Solutions
Bundle: Financial & Managerial Accounting, 13th + CengageNOWv2, 2 terms (12 months) Printed Access Card
- Answerarrow_forwardPlease provide answer the following requirements a and b on these financial accounting questionarrow_forwardCharlotte's Cleaning Services began the year with total liabilities of $120,000 and stockholders' equity of $55,000. During the year, the company earned $140,000 in net income and paid $10,000 in dividends. Total liabilities at the end of the year were $260,000. How much are total assets at the end of the year?arrow_forward
- ProForm acquired 70 percent of ClipRite on June 30, 2023, for $1,470,000 in cash. Based on ClipRite's acquisition-date fair value, an unrecorded intangible of $760,000 was recognized and is being amortized at the rate of $19,000 per year. No goodwill was recognized in the acquisition. The noncontrolling interest fair value was assessed at $630,000 at the acquisition date. The 2024 financial statements are as follows: Items Sales Cost of goods sold Operating expenses Dividend income Net income Retained earnings, 1/1/24 Net income Dividends declared Retained earnings, 12/31/24 Cash and receivables Inventory Investment in ClipRite Fixed assets Accumulated depreciation Totals Liabilities Common stock Retained earnings, 12/31/24 Totals Note: Parentheses indicate a credit balance. ProForm $ (1,030,000) 650,000 330,000 (56,000) $ (106,000) $ (3,800,000) (106,000) 330,000 $ (3,576,000) $ 630,000 520,000 1,470,000 2,200,000 (400,000) $ 4,420,000 $ (544,000) (300,000) (3,576,000) $ (4,420,000)…arrow_forwardFinished goods during the period?arrow_forwardSubject: financial accountingarrow_forward
- Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning




