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In: Accounting

VI. Given below is information about cost of goods sold, beginning and ending inventories, and average...

VI. Given below is information about cost of goods sold, beginning and ending inventories, and average accounts payable for Years 3, 4 and 5: Cost of Goods Sold Beginning Inventory Ending Inventory Sales Year 3 $1,895,400 $1,080,000 $540,000 $3,510,000 Year 4 $2,079,000 $540,000 $1,116,000 $3,960,000 Year 5 $2,250,000 $1,116,000 $525,600 $4,500000 Calculate for each year the following: (a) inventory turnover; (b) average number of days that inventory is on hand using 360 days in a year; and (c) gross profit margin rate up to two decimal place.

Solutions

Expert Solution

Answer :

Calculation of ratios :

Year - 3 :

a. Inventory Turnover ratio

= Cost of Goods Sold / Average Inventory

Average Inventory = ($1,080,000 + $540,000) / 2 = $810,000

Inventory Turnover ratio

= $1,895,400 / $810,000

= 2.34 times

b. Average number of days that inventory is on hand

= 360 days / Inventory Turnover ratio

= 360 days / 2.34 times

= 153.85 days

c. Gross profit margin rate

Gross Profit = Sales - Cost of Goods

= $3,510,000 - $1,895,400

= $1,614,600

Gross Profit Margin = Gross Profit / Sales x 100

= $1,614,600 / $3,510,000 x 100

= 46.00%

Year - 4 :

a. Inventory Turnover ratio

= Cost of Goods Sold / Average Inventory

Average Inventory = ($540,000 + $1,116,000) / 2 = $828,000

Inventory Turnover ratio

= $2,079,000 / $828,000

= 2.51 times

b. Average number of days that inventory is on hand

= 360 days / Inventory Turnover ratio

= 360 days / 2.51 times

= 143.43 days

c. Gross profit margin rate

Gross Profit = Sales - Cost of Goods

= $3,960,000 - $2,079,000

= $1,881,000

Gross Profit Margin = Gross Profit / Sales x 100

= $1,881,000 / $3,960,000 x 100

= 47.50%

Year - 5 :

a. Inventory Turnover ratio

= Cost of Goods Sold / Average Inventory

Average Inventory = ($1,116,000 + $525,600) / 2 = $820,800

Inventory Turnover ratio

= $2,250,000 / $820,800

= 2.74 times

b. Average number of days that inventory is on hand

= 360 days / Inventory Turnover ratio

= 360 days / 2.74 times

= 131.39 days

c. Gross profit margin rate

Gross Profit = Sales - Cost of Goods

= $4,500,000 - $2,250,000

= $2,250,000

Gross Profit Margin = Gross Profit / Sales x 100

= $2,250,000 / $4,500,000 x 100

= 50.00%

ekkarill92 answered 2 years ago
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