Question

Financial analysts and investors are very interested in how quickly a company is turning over its inventory as quick turnover yields higher profits. There are events that may have an effect on the inventory turnover ratio. Required: For each of the following two events, indicate and explain whether inventory turnover would increase, decrease or not be affected.

Inventory turnover = sales / average inventory = Cost of goods sold / average inventory

a. Change from Weighted Average Cost method to First-In, First-Out method during an inflationary environment.

b. Cut sales prices in order to increase sale.

Using First-In-First-Out (FIFO) method, Cost of Goods Sold = $4362.5 Ending Inventory = $4137.5

Using Weighted Average Cost method: Cost of Goods Sold =$4370.8 Ending Inventory =$4129.2

Answer 1