Question

The following data are available for Mart Jacks, INC.

Year 2 Year 1

Sales $1,139,600 $1,192,320  

Beginning Inventory 80,000 64,000

Cost of Goods Sold 500,800 606,000

Ending Inventory 72,000 80,000

1) determine for each year:

a) the inventory turnover

b) the number of days' sales in inventory ( Round intermediate calculation to the nearest whole number and your final answer to one decimal place)

2) What conclusions can be drawn from these data concerning the inventories?

Answer 1

the inventory turnover = Cost of Goods Sold / Average Inventory

Year 2 = Cost of Goods Sold =500800

Average Inventory= 80000 + 72000 / 2 = 76000

the inventory turnover = 500800 / 76000 = 6.59 Times

Year 1

Cost of Goods Sold = 606000

Average Inventory= 64000 + 80000 / 2 = 72000

the inventory turnover = 606000 / 72000 =8.42 Times

number of days' sales in inventory = 365 / Inventory Turnover Ratio

Year 2

365 / 6.59 = 55 days

Year 1

365 / 8.42 = 43 days

conclusions

Inventory Turnover ratio is higher the better so Year 1 Inventory Turnover ratio is better than Year 2 Inventory Turnover ratio it tells that how the inventory is efficiently managed by the company .We use Cost of goods sold in calculating the inventory turnover instead of using sales.

It tells that how many times the average inventory is sold during the year by the company.Inventory turnover ratio tells that whether the company is overstocking the inventory or not. Year 1 is better because the company is not overstocking the assets in comparison to Year 2