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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

Financial statement data for years ending December 31 for Holland Company follow:

  20Y4 20Y3
Cost of merchandise sold $4,504,500 $3,715,200
Inventories:    
Beginning of year 788,000 760,000
End of year 850,000 788,000
  1. a. Determine the inventory turnover for 20Y4 and 20Y3.
  2. b. Determine the days’ sales in inventory for 20Y4 and 20Y3. Use 365 days and round to one decimal place.
  3. c. Does the change in inventory turnover and the days’ sales in inventory from 20Y3 to 20Y4 indicate a favorable or an unfavorable trend?

(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: inventory turnover for 20Y4 and 20Y3.

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
Days’ sales in inventory ratio for 20Y4 and 20Y3.

(c)

To determine

To explain: if change in turnover and days’ sales in inventory from 20Y3 to 20Y4 indicate favorable or unfavorable trend.

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