(a)
Inventory turnover ratio: This is a financial measure that is used to evaluate as to how many times a company sells or uses its inventory during an accounting period. It is calculated by using the following formula:
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.
Gross profit rate is the financial ratio that evaluates the money left over out of the total revenues after deducting the cost of goods sold. Thus, it shows the relationship between the gross profit and net sales. It is calculated by using the following formula:
To Calculate: The inventory turnover for 2015, 2016, and 2017 of Company P.
(a)
Explanation of Solution
Calculate the inventory turnover of Company P for 2015.
Cost of goods sold = $18,038
Average inventory = $2,108 (1)
Calculate the inventory turnover of Company P for 2016.
Cost of goods sold = $20,351
Average inventory = $2,406 (2)
Calculate the inventory turnover of Company P for 2017.
Cost of goods sold = $20,099
Average inventory = $2,570 (3)
Working Notes:
Calculate the average inventory for 2015.
Beginning inventory = $1,926
Ending inventory = $2,290
Calculate the average inventory for 2016.
Beginning inventory = $2,290
Ending inventory = $2,522
Calculate the average inventory for 2017.
Beginning inventory = $2,522
Ending inventory = $2,618
Therefore, the inventory turnover of Company P for 2015, 2016, and 2017 are 8.56 times, 8.54 times, and 7.82 times respectively.
(b)
To Calculate: The days in inventory of Company P for 2015, 2016, and 2017.
(b)
Explanation of Solution
Calculate days in inventory of Company P for 2015.
Total number of days = 365
Inventory turnover, 2015 = 8.56 times (a)
Calculate days in inventory of Company P for 2016.
Total number of days = 365
Inventory turnover, 2015 = 8.46 times (a)
Calculate days in inventory of Company P for 2017.
Total number of days = 365
Inventory turnover, 2015 = 7.82 times (a)
Therefore, the days in inventory of Company P for 2015, 2016, and 2017 are 42.64 days, 43.14 days, and 46.67 days respectively.
(c)
To Calculate: The gross profit rate of Company P for 2015, 2016, and 2017.
(c)
Explanation of Solution
Calculate gross profit rate of Company P for 2015.
Gross profit = $21,436 (4)
Sales revenue = $39,474
Calculate gross profit rate of Company P for 2016.
Gross profit = $22,900 (5)
Sales revenue = $43,251
Calculate gross profit rate of Company P for 2017.
Gross profit = $23,133 (6)
Sales revenue = $43,232
Working Notes:
Calculate the gross profit for 2015.
Sales revenue = $39,474
Cost of goods sold = $18,038
Calculate the gross profit for 2016.
Sales revenue = $43,251
Cost of goods sold = $20,351
Calculate the gross profit for 2017.
Sales revenue = $43,232
Cost of goods sold = $20,099
Therefore, the gross profit rate of Company P for 2015, 2016, and 2017 are 54.3%, 52.9%, and 53.5% respectively.
(d)
To Comment: On the above observed trends.
(d)
Explanation of Solution
From the above computation, it is clear that the Company P has a decrease in inventory turnover from 2015 to 2017 by 9%. But there is an initial increase in days in inventory by almost 9% over the same time period. Thus, these changes will lead to indicate that it’s better to have a higher inventory turnover with a corresponding lower day in inventory.
This is a positive sign for Company P in running the business.
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Chapter 6 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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