Question

Cromwell company began the year with a balance in inventory of $119,000 and ended the year with a balance of $111,000. the net sales for the year were $1,001,000 with a gross profit on sales of $304,000. the inventory turnover ratio is closest to:

a) 8.70
b) 2.74
c) 6.06
d) 2.55

Answer 1

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. In this case, the inventory turnover ratio is closest to 6.06.

Step-by-step explanation:

The inventory turnover ratio measures how quickly a company sells its inventory. It is calculated by dividing the cost of goods sold by the average inventory. To find the average inventory, we add the beginning inventory and ending inventory, and then divide by 2. In this case, the cost of goods sold can be calculated by subtracting the gross profit on sales from the net sales.

Step 1: Calculate the cost of goods sold: $1,001,000 (net sales) - $304,000 (gross profit on sales) = $697,000 (cost of goods sold).

Step 2: Calculate the average inventory: ($119,000 (beginning inventory) + $111,000 (ending inventory)) / 2 = $115,000 (average inventory).

Step 3: Calculate the inventory turnover ratio: $697,000 (cost of goods sold) / $115,000 (average inventory) = 6.06.

Therefore, the inventory turnover ratio is closest to 6.06 (option c).