Financial Accounting
9th Edition
ISBN: 9781259222139
Author: Robert Libby, Patricia Libby, Frank Hodge Ch
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 7, Problem 7.7P
Evaluating the Effects of Manufacturing Changes on Inventory Turnover Ratio and
Mears and Company has been operating for five years as an electronics component manufacturer specializing in cellular phone components. During this period, it has experienced rapid growth in sales revenue and in inventory. Mr. Mears and his associates have hired you as Mears's first corporate controller. You have put into place new purchasing and manufacturing procedures that are expected to reduce inventories by approximately one-third by year-end. You have gathered the following data related to the changes:
| (dollars in thousands) | ||
| Beginning of Year | End of Year (projected) | |
| Inventory | $582,500 | $384,610 Current Year (projected) |
| Cost of goods sold | $7,283,566 | |
Required:
- 1. Compute the inventory turnover ratio based on two different assumptions:
- a. Those presented in the preceding table (a decrease in the balance in inventory).
- b. No change from the beginning-of-the-year inventory balance.
- 2. Compute the effect of the projected change in the balance in inventory on cash flow from operating activities for the year (indicate the sign and amount of effect).
- 3. On the basis of the preceding analysis, write a brief memo explaining how an increase in inventory turnover can result in an increase in cash flow from operating activities. Also explain how this increase can benefit the company.
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[The following information applies to the questions displayed below.]
Mears and Company has been operating for five years as an electronics component manufacturer specializing in cellular
phone components. During this period, it has experienced rapid growth in sales revenue and in inventory. Mr. Mears and
his associates have hired you as Mears's first corporate controller. You have put into place new purchasing and
manufacturing procedures that are expected to reduce inventories by approximately one-third by year-end. You have
gathered the following data related to the changes:
Inventory
(dollars in thousands)
Beginning
of Year
$585,700
End of Year
(projected)
$392,310
Current Year
Cost of goods sold
P7-7 Part 1
(projected)
$7,018,984
Required:
1. Compute the inventory turnover ratio based on two different assumptions:
Note: Round your answers to 1 decimal place.
a. Those presented in the above table (a decrease in the balance in inventory).
b. No change from the beginning-of-the-year…
[The following information applies to the questions displayed below.]
Mears and Company has been operating for five years as an electronics component manufacturer specializing in cellular
phone components. During this period, it has experienced rapid growth in sales revenue and in inventory. Mr. Mears and
his associates have hired you as Mears's first corporate controller. You have put into place new purchasing and
manufacturing procedures that are expected to reduce inventories by approximately one-third by year-end. You have
gathered the following data related to the changes:
Inventory
Cost of goods sold
(dollars in thousands)
Beginning
of Year
$585,700
End of Year
(projected)
$392,310
Current Year
(projected)
$7,018,984
P7-7 Part 2
2. What is the effect of the projected change in the inventory balance on cash flow from operating activities for the year?
Effect of change in inventory
Chapter 7 Solutions
Financial Accounting
Ch. 7 - Why is inventory an important item to both...Ch. 7 - Prob. 2QCh. 7 - Prob. 3QCh. 7 - Prob. 4QCh. 7 - Prob. 5QCh. 7 - The chapter discussed tour inventory costing...Ch. 7 - Prob. 7QCh. 7 - Contrast the effects of LIFO versus FIFO on...Ch. 7 - Contrast the income statement effect of LIFO...Ch. 7 - Prob. 10Q
Ch. 7 - Explain briefly the application of the LCM concept...Ch. 7 - Prob. 12QCh. 7 - Consider the following information: ending...Ch. 7 - The inventory costing method selected by a company...Ch. 7 - Which of the following is not a component of the...Ch. 7 - Consider the following information: beginning...Ch. 7 - Consider the following information: beginning...Ch. 7 - An increasing inventory turnover ratio a....Ch. 7 - If the ending balance in accounts payable...Ch. 7 - Which of the following regarding the lower of cost...Ch. 7 - Which inventory method provides a better matching...Ch. 7 - Which of the following is false regarding a...Ch. 7 - Prob. 7.1MECh. 7 - Recording the Cost of Purchases for a Merchandiser...Ch. 7 - Identifying the Cost of Inventories for a...Ch. 7 - Inferring Purchases Using the Cost of Goods Sold...Ch. 7 - Prob. 7.5MECh. 7 - Matching Inventory Costing Method Choices to...Ch. 7 - Reporting Inventory under Lower of Cost or Market...Ch. 7 - Determining the Effects of Inventory Management...Ch. 7 - Prob. 7.9MECh. 7 - Prob. 7.1ECh. 7 - Inferring Missing Amounts Based on Income...Ch. 7 - Prob. 7.3ECh. 7 - Inferring Merchandise Purchases Abercrombie and...Ch. 7 - Calculating Ending Inventory and Cost of Goods...Ch. 7 - Calculating Ending Inventory and Cost of Goods...Ch. 7 - Analyzing and Interpreting the Financial Statement...Ch. 7 - Analyzing and Interpreting the Financial Statement...Ch. 7 - Evaluating the Choice among Three Alternative...Ch. 7 - Evaluating the Choice among Three Alternative...Ch. 7 - Prob. 7.11ECh. 7 - Reporting Inventory at Lower of Cost or Market...Ch. 7 - Prob. 7.13ECh. 7 - Prob. 7.14ECh. 7 - Prob. 7.15ECh. 7 - Prob. 7.16ECh. 7 - Prob. 7.17ECh. 7 - Prob. 7.18ECh. 7 - Prob. 7.19ECh. 7 - Prob. 7.20ECh. 7 - (Chapter Supplement A) Analyzing the Effects of a...Ch. 7 - (Chapter Supplement B) FIFO and LIFO Cost of Goods...Ch. 7 - (Chapter Supplement C) Recording Sales and...Ch. 7 - Analyzing Items to Be Included in Inventory Travis...Ch. 7 - Prob. 7.2PCh. 7 - Evaluating Four Alternative Inventory Methods...Ch. 7 - Prob. 7.4PCh. 7 - Evaluating the LIFO and FIFO Choice When Costs Are...Ch. 7 - Evaluating the Income Statement and Cash Flow...Ch. 7 - Evaluating the Effects of Manufacturing Changes on...Ch. 7 - Evaluating the Choice between LIFO and FIFO Based...Ch. 7 - Prob. 7.9PCh. 7 - (Chapter Supplement A) Analyzing LIFO and FIFO...Ch. 7 - Prob. 7.1APCh. 7 - Evaluating Four Alternative Inventory Methods...Ch. 7 - Evaluating the UFO and FIFO Choice When Costs Are...Ch. 7 - Prob. 7.4APCh. 7 - Prob. 7.1CONCh. 7 - Finding Financial Information Refer to the...Ch. 7 - Finding Financial Information Refer to the...Ch. 7 - Comparing Companies within an Industry Refer to...Ch. 7 - Prob. 7.4CPCh. 7 - Using Financial Reports: Interpreting Effects of...Ch. 7 - Making a Decision as a Financial Analyst: Analysis...Ch. 7 - Evaluating an Ethical Dilemma: Earnings, Inventory...
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