Question

The following data were extracted from the income statement of Saleh Inc.:

Current Year Previous Year
Sales $12,750,000 $13,284,000
Beginning inventories 840,000 800,000
Cost of goods sold 6,375,000 7,380,000
Ending inventories 860,000 840,000
Determine for each year (1) the inventory turnover and (2) the number of days' sales in inventory. Round interim calculations to the nearest dollar and final answers to one decimal place. Assume 365 days a year.

Answer 1

1. Inventory turnover ratio for current year = $6,375,000 ÷ $850,000 = 7.5

Inventory turnover ratio for previous year = $7,380,000 ÷ $820,000 = 9.0

2. Days' sales in inventory for current year = 365 ÷ 7.5 = 48.6 days

Days' sales in inventory for current year = 365 ÷ 9.0 = 40.5 days

Step-by-step explanation:

1. The formula of inventory turnover ratio is shown below:

= Cost of goods sold ÷ average inventory

where,

average inventory = (opening inventory + ending inventory) ÷ 2

For current year = ($840,000 + $860,000) ÷ 2 = $850,000

For previous year = ($800,000 + $840,000) ÷ 2 = $820,000

And, the cost of goods for current year is $6,375,000

For previous year it is $7,380,000

So,

Inventory turnover ratio for current year = $6,375,000 ÷ $850,000 = 7.5

Inventory turnover ratio for previous year = $7,380,000 ÷ $820,000 = 9.0

2. The formula to compute number of days' sales in inventory is shown below:

= Number of days ÷ inventory turnover ratio

given that, number of days = 365

So,

Days' sales in inventory for current year = 365 ÷ 7.5 = 48.6 days

Days' sales in inventory for current year = 365 ÷ 9.0 = 40.5 days