Question

Merchandise Mavens Corporation sells goods throughout North America. One of its product lines has recently reported the following information to you at head office. Based on this information, you have become concerned that the company is experiencing difficulties selling the product.

	2015			2014			2013
Cost of Goods Sold	$	388,000		$	371,000		$	347,000
Gross Sales		426,000			426,000			426,000
Inventories		49,000			32,000			27,000
Sales Returns and Allowances		16,500			3,300			5,000

Required:

An analysis of the financial information to identify three observations that lead to concerns that the inventory will need to be written down to LCM will be as follows.

1.	Calculate the gross profit ratio for the three years. (Round your answers to 1 decimal place.)
Gross	Percentage: 2015: % 2014: % 2013: % 3-a. Determine the inventory turnover ratio and days to sell inventory for 2015 and 2014. (Use 365 days in a year. Round your answers to 1 decimal place.) 2015 2014 Inventory Turnover Ratio times per year ? times per year ? Days to Sell days. ? days. ?

Answer 1

Answer 1.

2015:

Gross Profit = Gross Profit / Net Sales
Gross Profit = $21,500 / $409,500
Gross Profit = 5.3%

2014:

Gross Profit = Gross Profit / Net Sales
Gross Profit = $51,700 / $422,700
Gross Profit = 12.2%

2013:

Gross Profit = Gross Profit / Net Sales
Gross Profit = $74,000 / $421,000
Gross Profit = 17.6%

Answer 3-a.

2015:

Average Inventory = ($49,000 + $32,000) / 2
Average Inventory = $40,500

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Inventory Turnover Ratio = $388,000 / $40,500
Inventory Turnover Ratio = 9.6 times

Days to sell inventory = 365 / Inventory Turnover Ratio
Days to sell inventory = 365 / 9.6
Days to sell inventory = 38.0 days

2014:

Average Inventory = ($32,000 + $27,000) / 2
Average Inventory = $29,500

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Inventory Turnover Ratio = $371,000 / $29,500
Inventory Turnover Ratio = 12.6 times

Days to sell inventory = 365 / Inventory Turnover Ratio
Days to sell inventory = 365 / 12.6
Days to sell inventory = 29.0 days