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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Inventory ratios for Dell and HP

Dell Inc. and Hewlett-Packard Development Company, L.P. (HP) are both manufacturers of computer equipment and peripherals. However, the two companies follow two different strategies. Dell follows primarily a build-to-order strategy, where the consumer orders the computer from a Web page. The order is then manufactured and shipped to the customer within days of the order. In contrast, HP follows a build-to-stock strategy, where the computer is first built for inventory, then sold from inventory to retailers, such as Best Buy. The two strategies can be seen in the difference between the inventory turnover and number of days’ sales in inventory ratios for the two companies. The following financial statement information is provided for Dell and HP for a recent fiscal year (in millions):

Chapter 7, Problem 7.4CP, Inventory ratios for Dell and HP Dell Inc. and Hewlett-Packard Development Company, L.P. (HP) are

a. Determine the inventory turnover ratio and the number of days’ sales in inventory ratio for each company. Use 365 days and round to one decimal place.

b. Interpret the difference between the ratios for the two companies.

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 and the Days’ sales in inventory ratio for Company H and Company D.

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. The inventory turnover ratio is an important measure as to how efficient is the management is good at managing inventory and achieving sales from it.

Therefore, the inventory turnover of Company H is 35.7 Times & the inventory turnover of Company D is 13.4 Times.

Calculate the Days’ sales in inventory ratio Company H and Company D.

The Days’ sale in inventory ratio for Company H is calculated as follows:

Days' sales in inventory=Days in accounting periodInventory turnover=36535.7=10

b.

To determine

To explain: the difference in inventory efficiency between two companies.

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