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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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Inventory Analysis

Callahan Company reported the following information for the current year.

Chapter 6, Problem 38BE, Inventory Analysis Callahan Company reported the following information for the current year.

Required:

1. Compute Callahan’s (a) gross profit ratio, (b) inventory turnover ratio, and (c) average days to sell inventory. (Round all answers to two decimal places.)

2. Explain the meaning of each number.

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

Requirement 1:

To calculate:

The Gross Profit Ratio, Inventory Turnover ratio, and Average days to sell inventory.

Explanation

The Gross Profit Ratio, Inventory Turnover ratio, and Average days to sell inventory are calculated as follows:

Net Sales (A) $ 280,000
Cost of Goods sold (B) $ 120,000
Gross Profit (C) = (A-B) $ 160,000
Gross Profit Ratio (D) = (C/A) 57...
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

Requirement 2:

To explain:

The Gross Profit Ratio, Inventory Turnover ratio, and Average days to sell inventory.

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