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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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What do the gross profit and inventory turnover ratios tell company management about inventory?

To determine

Concept introduction:

Gross Profit ratio:

Gross profit ratio is calculated by dividing the gross profit by sales. The formula to calculate the gross profit ration is as follows:

Gross Profit = Gross ProfitSales 

Inventory Turnover Ratio:

Inventory Turnover Ratio measures the efficiency of the company in converting its inventory into sales. It is calculated by dividing the Cost of goods sold by Average inventory. The formula of the Inventory Turnover Ratio is as follows:

Inventory Turnover Ratio=Cost of goods soldAverage inventory

Note: Average inventory is calculated with the help of following formula:

Average inventory=(Beginning inventory + Ending inventory)2

To indicate:

The meaning of Gross Profit and inventory turnover ratio.

Explanation

Gross Profit ratio:

Gross profit ratio is calculated by dividing the gross profit by sales. The formula to calculate the gross profit ration is as follows:

Gross Profit = Gross ProfitSales 

Inventory Turnover Ratio:

Inventory Turnover Ratio measures the efficiency of the company in converting its inventory into sales. It is calculated by dividing the Cost of goods sold by Average inventory

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