Question

James Audio Co Uses the Periodic inventory system. James reported these amounts on June 30, 2009:

Inventory, June 30 2008 $20,000

Inventory, June 30 2009 $22,000

Purchase (of inventory) $85000

Purchase Discount 4000

Purchase Return 9000

Frieght in 5000

Sales Revenue 190,000

Sales Returns 20,000

Compute James' inventory turnover ratio.

Answer 1

Firstly Inventory ratio is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level.

For eg : A business has made a sale of $120000 in a year. It had average inventory of $10000 during the year That means the business has sold the inventory 12 times in a year or you can say that they have an average inventory of 1 month sale at all times.

Inventory turnover can be calculated by using two methods:

Inventory turnover ratio= Net Sales/ Average Inventory

or Inventory turnover ratio= Cost of goods sold/ Average Inventory

In the given question, Inventory turnover ratio is calculated as follows:

Method:1

Net Sales = Sales Revenue - Sales Returns

= $190000-$20000

= $170000

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

=($20000+$22000)/2

=$21000

Hence, Inventory turnover ratio= Net sales / Average Inventory

=$170000/$21000

= 8.095 times

Method-2

Cost of goods sold = Opening Inventory+ Purchases-Discounts-Returns+Freight-Closing Invntory

= $(20000+85000-4000-9000+5000-22000)

=$75000

Inventory turnover ratio= COGS/ Average Inventory

=$75000/$21000

=3.571 times