Financial Accounting
9th Edition
ISBN: 9781259738692
Author: Libby
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
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.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
help
[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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Subject -acountingarrow_forwardComputer Associates International, Inc., the world's leading business software company, delivers the end-to-end infrastructure to enable e-business through innovative technology, services, and education. Recently, Computer Associates had 19,000 employees worldwide and revenue of over $6 billion. The following information is from the company's annual report. Computer Associates International, Inc. Management Discussion The Company has experienced a pattern of business whereby revenue for its third and fourth fiscal quarters reflects an increase over fırst- and second-quarter revenue. The Company attributes this increase to clients' increased spending at the end of their calendar year budgetary periods and the culmination of its annual sales plan. Since the Company's costs do not increase proportionately with the third- and fourth-quarters' increase in revenue, the higher revenue in these quarters results in greater profit margins and income. Fourth-quarter profitability is traditionally…arrow_forwardOwen's Electronics has nine operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales. The firm is working at full capacity. Cash Accounts receivable Inventory Current assets Fixed assets Total assets New funds Assets E 122 TOLCIE E S Balance Sheet (in $ millions) E $ 12 27 28 $ 67 45 N Owen's Electronics has an aftertax profit margin of percent and a dividend payout ratio of 40 percent. If sales grow by 30 percent next year, determine how many dollars of new funds are needed to finance the growth. Note: Do not round intermediate calculations. Enter your answer in dollars, not millions, (e.g., $1,234,567). $ 112 Liabilities and Stockholders' Equity Accounts payable Accrued wages Accrued taxes Current liabilities Notes payable Common stock…arrow_forward
- Malone Industries has been in business for five years and has been very successful. In the past year, it expanded operations by buying Hot Metal Manufacturing for a price greater than the value of the net assets purchased. In the past year, the customer base has expanded much more than expected, and the companys owners want to increase the goodwill account. Your CPA firm has been hired to help Malone prepare year-end financial statements, and your boss has asked you to talk to Malones managers about goodwill and whether an adjustment can be made to the goodwill account. How do you respond to the owners and managers?arrow_forwardJarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division. Required: 1. Compute the ROI and the margin and turnover ratios for each year for the Furniture Division. (Round your answers to four significant digits.) 2. Compute the ROI and the margin and turnover ratios for each year for the Houseware Division. (Round your answers to four significant digits.) 3. Explain the change in ROI from Year 1 to Year 2 for each division.arrow_forwardEthics and Revenue Recognition Alan Spalding is CEO of a large appliance wholesaler. Alan is under pressure from Wall Street Analysts to meet his aggressive sales revenue growth projections. Unfortunately, near the end of the year he realizes that sales must dramatically improve if his projections are going to be met. To accomplish this objective, he orders his sales force to contact their largest customers and offer them price discounts if they buy by the end of the year. Alan also offered to deliver the merchandise to a third-party warehouse with whom the customers could arrange delivery when the merchandise was needed. Required: Do you believe that revenue from these sales should be recognized in the current year? Why or why not?arrow_forward
- Owen's Electronics has nine operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales. The firm is working at full capacity. Assets Cash Accounts receivable Inventory Current assets Fixed assets Total assets $ 10 32 33 $ 75 New funds $118 Balance Sheet (in $ millions) Liabilities and Stockholdera Equity Accounts payable Accrued wages Accrued taxes Current liabilities Notes payable Common stock Retained earnings Total liabilities and stockholders' equity $18 7 11 $ 36 14 17 51 $118 TOUS REPOR Owen's Electronics has an aftertax profit margin of 9 percent and a dividend payout ratio of 50 percent. STA U SLU KUTEN HOTEL If sales grow by 25 percent next year, determine how many dollars of new funds are needed to finance the growth. (Do not…arrow_forwardPlease I need step 4 Gibson Corporation’s balance sheet indicates that the company has $580,000 invested in operating assets. During the year, Gibson earned operating income of $67,280 on $1,160,000 of sales. Required Compute Gibson’s profit margin for the year. Compute Gibson’s turnover for the year. Compute Gibson’s return on investment for the year. Recompute Gibson’s ROI under each of the following independent assumptions:(1) Sales increase from $1,160,000 to $1,392,000, thereby resulting in an increase in operating income from $67,280 to $76,560.(2) Sales remain constant, but Gibson reduces expenses, resulting in an increase in operating income from $67,280 to $69,600.(3) Gibson is able to reduce its invested capital from $580,000 to $464,000 without affecting operating income.arrow_forwardI'm preparing some examples for our next board meeting to illustrate how important it is to accurately align our sales forecasts to our production plans. I could use your help with this work. Andrews ended the year with excess inventory valued at $13,956,000. Had they sold all of their inventory last year at their current prices, how much more revenue could Andrews have generated? Louis Devries Board Member, Operations | Andrews Corporation $28,188,765 $4,523,140 $21,289,000 $13,956,000arrow_forward
- Can you help me with this question? Thank you for your help and time :)arrow_forwardOwen's Electronics has nine operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales. The firm is working at full capacity. Assets Cash Accounts receivable Inventory Current assets Fixed assets Total assets New funds $7 25 28 $ 60 45 Balance Sheet (in $ millions) $ 105 Liabilities and Stockholders' Equity Accounts payable Accrued wages Accrued taxes Current liabilities Notes payable Common stock Retained earnings Total liabilities and stockholders' equity X Answer is complete but not entirely correct. $ 11,900,000 X $ 20 7 13 $ 40 Owen's Electronics has an aftertax profit margin of 10 percent and a dividend payout ratio of 45 percent. If sales grow by 20 percent next year, determine how many dollars of new funds are needed to finance the…arrow_forwardPlease help me to solve this questionarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Financial Accounting: The Impact on Decision Make...
Accounting
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Cost Accounting - Definition, Purpose, Types, How it Works?; Author: WallStreetMojo;https://www.youtube.com/watch?v=AwrwUf8vYEY;License: Standard YouTube License, CC-BY