Question

The following information came from the income statement of the Watson Company: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. Inventory turnover is 6 times per year. What is Watson's days in inventory?

Answer 1

Days on Inventory 61

Step-by-step explanation:

`(COGS)/(Average Inventory) = $Inventory Turnover`

​where:

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

COGS: sales - COGS = gross profit

1,800,000 - COGS = 600,000

COGS: 1,800,000 - 600,000 = 1,200,000

Average Inventory: (160,000+240,000)/2 = 200,000

`(1,200,000)/(200,000) = $Inventory Turnover`

Inventory TO 6

The invenotry is sold 6 times over the course of a year. As the year has 365 days we can divide by the TO to know how many days it takes to sale the inventory:

Days outstanding:

`(365)/(Inventory TO) = $Days on Inventory`

`(365)/(6) = $Days on Inventory`

Days on Inventory 61