Question

Inventory Analysis The following data were extracted from the income statement of Keever Inc.: Current Year Previous Year Sales $1,168,000 $1,222,000 Beginning inventories 87,720 86,244 Cost of goods sold 584,000 678,900 Ending inventories 79,320 87,720 a. Determine for each year (1) the inventory turnover and (2) the number of days' sales in inventory. Round interim calculations to the nearest dollar and the final answers to one decimal place. Assume 365 days a year. Current Year Previous Year 1. Inventory turnover 2. Number of days' sales in inventory days days b. The inventory position of the business has . The inventory turnover has , while the number of days' sales in inventory has

Answer 1

Ans. a. 1: As Inventory Turnover is the number of times a company sells and replaces its stock of goods during a period. Formula to calculate Inventory Turnover is to divide cost of goods sold by average inventory of same period.

Average Inventory for current year is (79320+87720)/2= 83520 & Average Inventory for Previous Year is (87720+86244)= 86982.

So Inventory Turnover for Current Year is  =584000/83520= 6.99 and for Previous Year is 678900/86982= 7.80

Ans. a.2: Number of day's sales in Inventory (DSO) measures how many days it takes for inventory to turn into sales. Formula to calculate is to take the inverse of the inventory turnover ratio and multiply it by 365. Which means (Average Inventory/ Cost of Goods Sold) x 365.

So the Number of day's sales in Inventory for Current Year is =(83520/584000)*365= 52 days & for Previous Year is =(86982/678900)*365=47 days.

Ans. 2: The inventory position of the business has worsen in current year as the inventory turnover ration has decreased to 6.99 compared to previous year 7.80, while the number of day's sales in inventory has increased to 52 days compared to 47 days of previous year.