Question

Perez Corporation has the following financial data for the years 20X1 and 20X2:

20X1 20X2
Sales $8,000,000 $10,000,000
Cost of goods sold 6,000,000 9,000,000
Inventory 800,000 1,000,000

Required:
a. Compute the inventory turnover for each year using the formula Sales/Inventory.
b. Compute inventory turnover based on an alternative calculation that is used by many financial analysts, Cost of goods sold/Inventory, for each year.

Answer 1

Perez Corporation

a. Inventory turnover = Sales/Inventory

20X1 = 10x

20X2 = 10x

b. Inventory turnover = Cost of goods sold/Inventory

20X1 = 7.5x

20X2 = 9x

Step-by-step explanation:

a) Data and Calculations:

20X1 20X2

Sales $8,000,000 $10,000,000

Cost of goods sold 6,000,000 9,000,000

Inventory 800,000 1,000,000

Average inventory = $900,000 ($1,800,000/2)

a. Inventory turnover = Sales/Inventory

20X1 = 10x ($8,000,000/$800,000)

20X2 = 10x ($10,000,000/$1,000,000)

b. Inventory turnover = Cost of goods sold/Inventory

20X1 = 7.5x ($6,000,000/$800,000)

20X2 = 9x ($9,000,000/$1,000,000)