Question

Inventory turnover and number of days’ sales in inventory Financial statement data for years ending December 31 for Tango Company follow: 20Y7 20Y6 Cost of goods sold $3,791,255 $4,040,550 Inventories: Beginning of year 766,500 730,000 End of year 846,800 766,500 Required

a. Determine the inventory turnover for 20Y7 and 20Y6. Round to one decimal place. 20Y7 20Y6 Inventory turnover

b. Determine the number of days’ sales in inventory for 20Y7 and 20Y6. Use 365 days and round to one decimal place. 20Y7 20Y6 Number of days’ sales in inventory days days

c. Are the changes in inventory turnover and the number of days’ sales in inventory from 20Y6 to 20Y7 favorable or unfavorable?

Answer 1

Ans:

a)Calculation of Inventory turnover:
inventory turnover= cost of goods sold/ Average account inventory
2017
Average inventory= (766500+846800)/2= 806650
inventory turnover= 3791255/806650=4.7
Inventory turnover is 4.7 times
2016
Average inventory= (766500+730000)/2=748250
inventory turnover= 4040550/748250= 5.4 times
Inventory turnover is 5.4 times
Calculation of days sale in in inventory:
days sale in in inventory= 365/inventory turnover
2017
days sale in in inventory=365/4.7= 77.7days
2016
days sale in in inventory=365/5.4= 67.6 days
Changes will be favourable since the higher the inventory turnover ratio the better it is
for the company