Question

The January 28, 2017 (fiscal year 2016) financial statements of Caleres, Inc. reported the following information (in thousands):

Caleres, Inc.	2016	2015
Cost of sales	$1,517,397	$1,529,527
Inventories, net	585,764	546,745
LIFO reserve	4,345	4,094

The footnotes to the 2016 financial statements of Skechers U.S.A., Inc. reported that the company uses the FIFO method of accounting for inventories. Financial statements reported the following (in thousands):

Skechers U.S.A., Inc.	2016	2015
Cost of sales	$1,928,715	$1,723,315
Inventories, net	700,515	620,247

a.      Calculate the two companies’ days-inventory-outstanding ratios for 2016 to allow for a comparison.

b. Which company is more efficient with its inventory?

c. Suggest two ways that Calares might improve the days-inventory-outstanding.

Answer 1

1. Days inventory outstand ratio= Inventory / cost of good sold * days in a year

In 2016, For Caleres Inc.

Inventory= 587,764

COGS= 1517397

Days inventory outstanding= 587764/1517397 *365= 141.38 or 141 days

In 2016, For Skechers U.S.A., Inc.

Inventory= 700515

COGS= 1928715

Days inventory outstanding=

= 700515/1928715 *365

=132.56 or 133 days

b.

sketchers USA is more efficient in its inventory as it takes less days to hold the inventory and they sell their inventory quicker as compared to Caleres.

c.

ways to improve inventory outstanding:

high inventory turnover means the company is keeping the stock for longer period of time , so they could do the following steps to reduce the ratio

1. Change the method of calculating inventory. The formula for COGS is beginning inventory plus purchases less ending inventory. And FIFO methods record lower COGS , which would mean lower inventory outstanding days, so the company should change from LIFO to FIFO .
2. Improve the sales , increase the value of sales so that the inventory is quickly sold