Question

Tamarisk Merchants reported the following on its income statement for the fiscal year ended December 31, 2021 and 2020. 2021 2020 Sales $495,160 $475,490 Cost of goods sold     Beginning inventory 145,780 154,124     Net purchases 346,090 322,660     Ending inventory (138,874) (145,780) Cost of goods sold 352,996 331,004 Gross profit 142,164 144,486 Operating expenses 87,568 89,168 Profit $54,596 $55,318

Calculate the inventory turnover ratio for Tamarisk for 2021 and 2020. (Round answers to 2 decimal places, e.g. 52.75.) Calculate the days sales in inventory for Tamarisk for 2021 and 2020. (Round answers to 0 decimal places, e.g. 5,275 and use 365 days for calculation.) Calculate the gross profit margin for Tamarisk for 2021 and 2020. (Round answers to 1 decimal place, e.g. 52.7%.) Calculate the profit margin for Tamarisk for 2021 and 2020. (Round answers to 1 decimal place, e.g. 52.7%.) For each ratio calculated in (a), (b), (c) and (d) above, identify if the ratio has improved or deteriorated from 2020 to 2021.

Answer 1

Answer a)

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

For 2020 -

Cost of Goods Sold = $331,004 (Given)

Beginning Inventory = $154,124 (Given)

Ending Inventory = $145,780 (Given)

Therefore,

Average Inventory = ($154,124 + $145,780) / 2

= $299,904 / 2

= $149,952

Therefore,

Inventory Turnover Ratio = ($331,004 / $149,952)

= 2.2073

= 2.21 (Rounded off to two decimal places)

For 2021 -

Cost of Goods Sold = $352,996 (Given)

Beginning Inventory = $145,780 (Given)

Ending Inventory = $138,874 (Given)

Average Inventory = ($145,780 + $138,874) / 2

= $284,654 / 2

= $142,327

Therefore,

Inventory Turnover Ratio = ($352,996 / $142,327)

= 2.4801

= 2.48 (Rounded off to two decimal places)

Since, a higher Inventory Turnover Ratio is preferred. Therefore, Ratio has improved from 2.21 in 2020 to 2.48 in 2021.

Answer b)

Days sales in inventory = 365 / Inventory Turnover Ratio

For 2020 -

Inventory Turnover Ratio = 2.21 (calculated above)

Therefore,

Days sales in inventory = 365 / 2.21

= 165.158

= 165 days (Rounded off to zero decimal places)

For 2021 -

Inventory Turnover Ratio = 2.48 (calculated above)

Therefore,

Days sales in inventory = 365 / 2.48

= 147.177

= 147 days (Rounded off to zero decimal places)

Since, a lower Days Sales in inventory is preferred. Therefore, Days Sales in Inventory has improved from 165 in 2020 to 147 in 2021.

Answer c)

Gross Profit Margin = (Gross Profit / Net Sales) * 100

For 2020 -

Gross Profit = $144,486 (Given)

Net Sales = $475,490 (Given)

Therefore,

Gross Profit Margin = ($144,486 / $475,490) * 100

= 0.3038 * 100

= 30.38%

= 30.4% (Rounded off to one decimal place)

For 2021 -

Gross Profit = $142,164 (Given)

Net Sales = $495,160 (Given)

Therefore,

Gross Profit Margin = ($142,164 / $495,160) * 100

= 0.2871 * 100

= 28.71%

= 28.7% (Rounded off to one decimal place)

Since, a higher gross profit margin is preferred. Therefore, gross profit margin has deteriorated from 30.4% in 2020 to 28.7% in 2021.

Answer d)

Profit Margin = (Net Profit / Net Sales) * 100

For 2020 -

Net Profit = $55,318 (Given)

Net Sales = $475,490 (Given)

Therefore,

Profit Margin = ($55,318 / $475,490) * 100

= 0.1163 * 100

= 11.63

= 11.6% (rounded off to one decimal place)

For 2021 -

Net Profit = $54,596 (Given)

Net Sales = $495,160 (Given)

Therefore,

Profit Margin = ($54,596 / $495,160) * 100

= 0.1102 * 100

= 11.02%

= 11% (Rounded off to one decimal place)

Since, a higher profit margin is preferred. Therefore, profit margin has deteriorated from 11.6% in 2020 to 11% in 2021.

Note : I have explained whether the ratios have improved or deteriorated in the solution of every part itself.