Question

Inventory Turnover and days’ sales in inventory

Kracker Corp., Foodstuff, Inc., and Winston Stores, Inc. are three grocery chains in the United States. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory (in millions) information:

	Kracker Corp.	Foodstuff Inc.	Winston Stores
Cost of merchandise sold	$32,850.0	$33,215.0	$35,040.0
Inventory, beginning of year	1,908.9	2,042.0	1,483.2
Inventory, end of year	1,871.1	1,962.0	1,396.8

a. & b. Determine the inventory turnover and the number of days’ sales in inventory (use 365 days and round to the nearest day) for the three companies. Round all interim calculations to one decimal place. For days' sales in inventory, round final answers to the nearest day, and for inventory turnover, round to one decimal place.

Company names	Inventory Turnover	Days' Sales in Inventory
Kracker	fill in the blank 1	fill in the blank 2 days
Foodstuff	fill in the blank 3	fill in the blank 4 days
Winston Stores	fill in the blank 5	fill in the blank 6 days

c. The inventory turnover ratios and days’ sales in inventory are   for Kracker and Foodstuff. Winston Stores has a   inventory turnover and a   days’ sales in inventory than Kracker and Foodstuff. These results suggest that Kracker and Foodstuff are   efficient than Winston Stores in managing inventory.

d. If Kracker had Winston Stores’ days’ sales in inventory, how much additional cash flow would have been generated from the smaller inventory relative to its actual average inventory position? Round interim calculations to one decimal place and your final answer to the nearest million.
$fill in the blank 11 million

Answer 1

Ans: Inventory Turnover= COGS/Average Inventory

Average Inventory= Opening Inventory+ Closing Inventory/2

For Kracker Corp:

Inventory Turnover= 32,850/[1,908.9+1,871.1]/2

=> 32,850/3,780/2

=> 32,850/1,890

=> 17.38 times

Days Sale in Inventory= 365/Inventory turnover

=> 365/17.38

=> 21 days

For Foodstuff Inc:

Inventory Turnover= 33,215/[2,042+1,962]/2

=> 33,215/4,004/2

=> 33,215/2,002

=> 16.59 times

Days Sale in Inventory= 365/Inventory turnover

=> 365/16.59

=> 22 Days.

For Winston stores:

Inventory Turnover= 35,040/[1,483.20+1,396.80]/2

=> 35,040/2,880/2

=> 35,040/1,440

=> 24.33 times

Days Sale in Inventory= 365/Inventory turnover

=> 365/24.33

=> 15 Days.

C). The inventory turnover ratios and days’ sales in inventory are 17.38 times and 21 days for Kracker Corp.

and for Foodstuff Inc are 16.59 times and 22 days. Winston Stores has a 24.33 times inventory turnover and a 15 days’ sales in inventory than Kracker and Foodstuff

D). If Kracker had Winston Stores’ days’ sales in inventory, additional cash flow would have been generated from the smaller inventory relative to its actual average inventory position

Let Average Inventory be X

Days Sales in Inventory= Average Inventory/{Cost of Merchandise Sold}/365

15= X/{32,850/365}

15= X/ 90

X= $1,350

Cash Flow Potential= Actual Average Inventory- Hypothetical Average Inventory

=> 1,890-1,350

=> 540 million i.e.  additional cash flow would have been generated from the smaller inventory relative to its actual average inventory position