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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

Comparing inventory ratios for three companies

The general merchandise retail industry has a number of segments represented by the following companies:

Company Name Merchandise Concept
Costco Wholesale Corporation Membership warehouse
Wal-Mart Discount general merchandise
JCPenney Company Department store

For a recent year, the following cost of merchandise sold and beginning and ending inventories have been provided from corporate annual reports (in millions) for these three companies:

Costco Wal-Mart JCPenny
Cost of merchandise sold $101,065 $365,086 $8,074
Merchandise inventory, beginning 8,908 45,141 2,721
Merchandise inventory, ending 8,456 44,858 2,652
  1. a. Determine the inventory turnover ratio for all three companies. Round to two decimal places.
  2. b. Determine the days’ sales in inventory for all three companies. Use 365 days and round to one decimal place.
  3. c. Interpret these results based on each company’s merchandise concept

(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

To determine: the inventory turnover for Company C, Company W and Company JC

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 C, Company W and Company JC.

(c)

To determine

To interpret: the above calculated ratios.

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