Large retailers like The Home Depot and Wal-Mart typically use gross margin ratio (gross margin ÷ sales), inventory turnover (sometimes referred to as inventory turns), and gross margin return on investment (GMROI) to evaluate how well inventory has been managed. The goal is to maximize profits while minimizing the investment in inventory. Below are data for four scenarios, a base scenario (# 1) followed by three modifications (#s 2, 3, & 4) to the base scenario.   Scenario 1 Scenario 2 Scenario 3 Scenario 4 Sales $10,000 $20,000 $12,000 $10,000 Cost of goods sold 6,000 12,000 6,000 6,000 Gross profit $4,000 $8,000 $6,000 $4,000 Average inventory $6,000 $6,000 $6,000 $5,000   For each scenario calculate the gross margin percent, the inventory turnover, and GMROI.

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A:

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.