Question

The following is information for Palmer Co.

2017 2016 2015
Cost of goods sold $ 578,825 $ 361,650 $ 326,300
Ending inventory 102,900 93,250 98,000
Required:
A) Use the above information to compute inventory turnover for 2017 and 2016, and its days' sales in inventory at December 31, 2017 and 2016.

Answer 1

Step-by-step explanation:

The computation of inventory turnover and the days sales in inventory is shown below:

Inventory turnover ratio equals to

= Cost of goods sold ÷ average inventory

where,

Average inventory = (Opening balance of inventory + ending balance of inventory) ÷ 2

For 2017, it would be

= $(578,825) ÷ {($102,900 + $93,250) ÷ 2}

= $(578,825) ÷ ($98,075)

= 5.90 times

For 2016, it would be

= ($361,650) ÷ {($98,000 + $93,250) ÷ 2}

= ($361,650) ÷ ($95,625)

= 3.78 times

Now the days sales in inventory is

= Total number of days in a year ÷ inventory turnover ratio

For 2017, it would be

= 365 days ÷ 5.90 times

= 61.86 days

For 2016, it would be

= 365 days ÷ 3.78 times

= 96.56 days

We assume there are 365 days in a year