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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Inventory turnover and days’ sales in inventory

Kroger, Sprouts Farmers Market, Inc., and Whole Foods Markets, Inc. are three grocery chains in the United States. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory (in millions) information:

  Kroger Sprouts Whole Foods
Cost of merchandise sold $85,512 $2,541 $9,973
Inventory, end of year 5,688 165 500
Inventory, beginning of year 5,651 143 441
  1. a. Determine the inventory turnover. Round to two decimal places.
  2. b. Determine the days’ sales in inventory. Round to one decimal place.
  3. c. Interpret your results in parts (a) and (b).
  4. d. If Kroger had Whole Foods’ days’ sales in inventory, how much additional cash flow (rounded to nearest million) would have been generated from the smaller inventory relative to its actual average inventory position?

(a)

To determine

Liquidity ratios: Liquidity explains the extent of cash’s nearness to assets and liabilities. It explains how easily assets can be converted into cash. Following are the types of ratios that help to find liquidity position of a company.

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:

Inventory turnover=Cost of goods soldAverage 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:

Days' sales in inventory=Days in accounting periodInventory turnover

To determine: the inventory turnover for Company K, Company S and Company WF

Explanation

The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory during the period. The average inventory is calculating by dividin...

(b)

To determine
the Days’ sales in inventory ratio for Company K, Company S and Company WF.

(c)

To determine

To interpret: the above calculated ratios.

(d)

To determine

To state: the additional cash flow that would be generated if company K had company WF’s days’ sales in inventory.

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