Question

In: Accounting

Inventory Turnover and Days’ Sales in Inventory The Southern Corporation installed a new in- ventory management...

Inventory Turnover and Days’ Sales in Inventory The Southern Corporation installed a new in-

ventory management system at the beginning of 2018. Shown below are data from the company’s

accounting records as reported by the new system:

2018 2019

Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,000,000 $20,000,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,600,000 9,200,000

Beginning inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 2,530,000

Ending inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,530,000 2,600,00

Calculate the company’s (a) inventory turnover (round to three decimal places) and (b) days’ sales in

inventory for 2018 and 2019. Comment on your results

explain he results :

Solutions

Expert Solution

(a). Inventory turnover

= Cost of good sold / Average Inventory

For 2018

Cost of goods sold =  8,600,000

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

= ( 2,500,000 + 2,530,000 ) / 2

= 2,515,000

Inventory turnover = 8,600,000 / 2,515,000

Inventory turnover = 3.42 times

For 2019

Cost of goods sold = 9,200,000

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

= ( 2,530,000 + 2,600,000 ) / 2

= 2,565,000

Inventory turnover = 9,200,000 / 2,565,000

Inventory turnover = 3.59 times

(b) Days’ sales in inventory

= 365 days / Inventory turnover ratio

2018

= 365 days / 3.42 times

= 106.72

2019

= 365 days / 3.59 times

= 101.67

Comments:

  • Ideal inventory turnover ratio lies between 5 to 10 , this means company needs to manage this ratio to attain a profiatble position in market.
  • Days Sales in inventory is less in 2019 it means company is able to convert it's stock into cash sooner then in 2018. This shows that company is in good liquidity position.

ekkarill92 answered 2 years ago
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