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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Inventory turnover and number of days' sales in inventory

Kroger, Safeway 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 information:

Chapter 7, Problem 7.21EX, Inventory turnover and number of days' sales in inventory Kroger, Safeway Inc. , and Whole Foods , example  1

The cost of goods sold for each company was:

Chapter 7, Problem 7.21EX, Inventory turnover and number of days' sales in inventory Kroger, Safeway Inc. , and Whole Foods , example  2

a. Determine the number of days’ sales in inventory (use 365 days and round to the nearest day) and the inventory turnover (round to one decimal place) for the three companies.

b. Interpret your results in p art (a).

c. If Kroger had Whole Foods’ number of 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

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

the inventory turnover for Company K, Company S and Company W

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 dividing beginning inventory and ending inventory by 2...

b)

To determine

To interpret: the above calculated ratios.

c)

To determine

The amount of cash flow that would have been generated if Company K had Company W’s number of day’s sales in inventory.

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