Question

The following is a portion of the condensed income statement for Rowan, Inc., a manufacturer of plastic containers:

Particulars	Amount$	Amount$
Net Sales		2,460,000
Less : Cost of goods sold :
Inventory,January 1	6,30,000
Net purchases	1,900,000
Inventory,December 31	6,90,000	1,840,000
Gross profit		$6,20,000

(1) Determine Rowan's Inventory turnover

Answer 1

Inventory turnover ratio : Inventory turnover ratio is an activity ratio that assesses a company's capacity to efficiently manage inventory and earn cash via sales. It calculates the inventory's liquidity. It may be computed using the formula below.

Inventory turnover ratio = Cost of goods sold / Average inventory

Calculation of Inventory turnover ratio

Inventory turnover ratio = Cost of goods sold / Average Inventory

=$1,840,000 / $6,60,000

=2.79 times

Calculation of Average inventory

Average inventory = Opening inventory + Closing inventory / 2

=$6,30,000 + $6,90,000 / 2

=$1,320,000 / 2

=$6,60,000

 

 

Therefore, inventory turnover ratio of Rowan inc is 2.79 times