The following data were extracted from the income statement of Keever Inc.:

Inventory Analysis

	Current Year	Previous Year
Sales	$1,270,200	$1,327,100
Beginning inventories	70,738	70,964
Cost of goods sold	635,100	737,300
Ending inventories	63,938	70,738

a. Determine for each year (1) the inventory turnover and (2) the number of days' sales in inventory. Round interim calculations to the nearest dollar and the final answers to one decimal place. Assume 365 days a year.

	Current Year		Previous Year
1. Inventory turnover
2. Number of days' sales in inventory		days		days

b. The inventory position of the business has deteriorated . The inventory turnover has decreased , while the number of days' sales in inventory has increased .

Solutions

Expert Solution

Inventory Turnover = Cost of goods sold/Average Inventory

Average Inventory = (Opening Inventory+closing Inventory)/2

Current year =(70738+63938)/2= 67338
Previous year = (70964+70738)/2= 70851

Answer 1.

Inventory Turnover = Cost of goods sold/Average Inventory

Current Year= 635100/67338= 9.43 times
Previous year = 737300/70851 = 10.41 times

Answer 2. Number of day's sale in inventory= 365/Inventory Turnover ratio

Current year = 365/9.43 =38.71 days
Previous year = 365/10.41= 35.06 days

Inventory Turnover ratio indicates how fast inventory is used or sold. A high ratio is good from the view point of liquidity. A low ratio indicates that inventory is not used /sold and stays in warehouse for long time.

ekkarill92 answered 2 years ago

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