Question

Making Business Decisions: Analyzing Apple’s Inventory Turnover Ratio

You are considering an investment in the common stock of Apple Inc. The following information is from the financial statements included in Form 10-K for fiscal years 2015 and 2014 (in millions of dollars):

Cost of sales for the year ended:
September 26, 2015	$140,089
September 27, 2014	112,258
Inventories:
September 26, 2015	2,349
September 27, 2014	2,111
September 29, 2013	1,764

The following information is from the financial statements included in Form 10-K for fiscal years 2015 and 2014 for Hewlett-Packard Company (in millions of dollars):

Cost of sales for the year ended:
October 31, 2015	$53,081
October 31, 2014	56,469
Inventory:
October 31, 2015	6,485
October 31, 2014	6,415
October 31, 2013	6,046

Use 360 days a year.

Required:

1. Calculate the inventory turnover ratios for Apple Inc. and Hewlett-Packard Company for the years ending September 26, 2015 and October 31, 2015, respectively. If required, round your answers to one decimal place.

Apple Inc.:	____times
Hewlett-Packard:	_____times

2. Which company appears to be performing better?
A. Helett-Packard

B. Apple Inc.

3. Assume Company A has an inventory turnover ratio of 52.8 times and Company B has inventory turnover ratio of 12.6. Based on this information, which of the following statement is correct?

A. Company A is performing better, when it comes to inventory management.

B. Company B is performing better, when it comes to inventory management.

C. Company A sells its product every 6.2 days.

D. Company B sells its products every 4.9 days.

Answer 1

We can calculate the desired results as follows:

A) Inventory Turnover ratio = Cost of Goods Sold / Average Inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

inventory turnover ratios for Apple Inc. and Hewlett-Packard Company for the years ending September 26, 2015

Average Inventory = ( 2,111 + 2,349 ) / 2

= 4,460 / 2

= $ 2,230

Cost of Goods Sold = $ 140,089

Inventory turnover ratio of Apple Inc = 140,089 / 2,230

= 62.8 Times

inventory turnover ratios Hewlett-Packard Company for the years ending October 31, 2015

Average Inventory = ( 6,415 + 6,485 ) / 2

= 12,900 / 2

= $ 6,450

Cost of Goods Sold = $ 53,081

Inventory turnover ratio of Hewlett-Packard = 53,081 / 6,450

= 8.2 Times

B) Apple Inc appears to be performing better than Helett-Packard as higher is the inventory turnover ratio lesser is the period in which the inventory is cleared.

C) Assume Company A has an inventory turnover ratio of 52.8 times and Company B has inventory turnover ratio of 12.6. In this case we need to find the Average days to sell inventory for both company A & B. Here we take 360 days a year.

Average days to sell inventory = 365 days / Inventory Turnover Ratio

Average days to sell inventory for Company A = 360 / 52.80

= 6.82 Days

Average days to sell inventory for Company B = 360 / 12.60

= 28.57 Days

So, we can say that company A is performing better, when it comes to inventory management.

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