Question

Pennington Corporation's 2018 balance sheet includes the following information: Cash 12,000 Accounts receivable 5,000 Inventory 45,000 Accounts payable 19,000 Selected information from the 2018 income statement is provided below: Net sales revenue 354,000 Purchases 164,000 Cost of goods sold 156,000 Interest expense 12,000 What is Pennington's inventory turnover ratio? Round your answer to two decimal places

Answer 1

Inventory turnover is 3.80

Step-by-step explanation:

Inventory turnover is computed by dividing Cost of Goods Sold over Average inventory.

First step, compute the average inventory. Average inventory is computed by adding beginning inventory and ending inventory then divide it by 2. Since, ending inventory is in the given data, we will compute the beginning inventory. Accounts that affects the inventory are the Purchases, Cost of Goods sold and the ending inventory. To get beginning inventory, we add ending inventory and cost of goods sold then deduct the purchases.

45,000 + 156,000 = 201,000 - 164,000 = 37,000 (Beginning inventory)

37,000 + 45,000 = 82,000 / 2 = 41,000 (Average inventory)

Then, compute inventory turnover.

Formula : Cost of goods sold / average inventory

156,000 / 41,000 = 3.80