Question

The following information is available for Splish Brothers Inc. for three recent fiscal years. 2022 2021 2020Inventory $580,000 $590,000 $320,000Net sales 1,950,000 1,750,000 1,350,000Cost of goods sold 1,462,500 1,228,500 938,000Calculate the inventory turnover, days in inventory, and gross profit rate for 2022 and 2021. 2022 2021Inventory Turnover times timesDays in Inventory days daysGross Profit Rate % %

Answer 1

In 2021:

Inventory Turnover for 2021: 2.7 times

Days in inventory: 135.19 days

Gross Profit Rate: 29.8%

In 2022:

Inventory Turnover for 2022: 2.5 times

Days in inventory: 146 days

Gross Profit Rate: 25%

Step-by-step explanation:

Inventory turnover ratio is calculated by using following formula:

Inventory turnover ratio = Cost of Goods Sold/Average Inventory

Average Inventory = (Inventory beginning of year + Inventory end of year )/2

In the company:

Average Inventory for 2021 = ($590,000 + $320,000)/2 = $455,000

Average Inventory for 2022 = ($580,000 + $590,000)/2 = $585,000

In 2021:

Inventory Turnover for 2021 = $1,228,500/$455,000 = 2.7 times

Days in inventory = 365/Inventory Turnover = 365/2.7 = 135.19 days

Gross Profit Rate = Gross profit/net sales = (Net Sales - Cost of goods sold)/Net Sales = ($1,750,000 - $1,228,500)/$1,750,000 = 0.298 = 29.8%

In 2022:

Inventory Turnover for 2022 = $1,462,500/$585,000 = 2.5 times

Days in inventory = 365/Inventory Turnover = 365/2.5 = 146 days

Gross Profit Rate = Gross profit/net sales = (Net Sales - Cost of goods sold)/Net Sales = ($1,950,000 - $1,462,500)/$1,950,000 = 0.25 = 25%