Question

The following information pertains to Baxter Co:

Inventory at beginning of year ----------$200,000
Inventory at year end --------------------$300,000
Cost of goods sold during the year ----$500,000

What was Baxter's inventory turnover for the year?

A.1.0
B.1.5
C.2.0
D.2.5

Answer 1

Baxter Co's inventory turnover ratio for the year is 2.0, calculated by dividing the cost of goods sold ($500,000) by the average inventory ($250,000).

Step-by-step explanation:

Baxter Co.'s inventory turnover ratio is a key financial metric used to assess how efficiently the company manages its inventory throughout the year. The formula for calculating the inventory turnover ratio is given by dividing the cost of goods sold (COGS) by the average inventory. In this case, the average inventory is determined by adding the beginning and ending inventory values and dividing the sum by 2.

For Baxter Co., the average inventory is calculated as ($200,000 + $300,000) / 2, resulting in $250,000. With a cost of goods sold (COGS) of $500,000, the inventory turnover ratio is computed as $500,000 / $250,000, equaling 2.0.

A 2.0 inventory turnover ratio indicates that, on average, Baxter Co. sold and replaced its entire inventory twice during the specified period. This figure reflects the company's efficiency in managing its inventory levels and suggests a relatively high rate of inventory turnover. A higher inventory turnover ratio is generally considered positive, as it implies that the company is minimizing holding costs and is adept at converting inventory into sales.

In summary, the inventory turnover ratio of 2.0 for Baxter Co. is a favorable indicator, suggesting effective inventory management practices and a brisk pace of inventory turnover throughout the given year.