Chapter 7, Problem 7.8BPE

(a)

To determine

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:

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

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:

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

inventory turnover for 2016 and 2015.

(b)

To determine

Days’ sales in inventory ratio for 2016 and 2015.

(c)

To determine

To explain: if change in turnover and days’ sales in inventory from 2015 to 2016 indicate favorable or unfavorable trend.