Question

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College Coasters is a San Diego–based merchandiser specializing in logo-adorned drink coasters. The company reported the following balances in its unadjusted trial balance at December 1.

Cash	$	9,800
Accounts Receivable		1,900
Inventory		500
Prepaid Rent		540
Equipment		660
Accumulated Depreciation		110
Accounts Payable		1,380
Salaries and Wages Payable		300
Income Taxes Payable		0
Common Stock		6,400
Retained Earnings		2,600
Sales Revenue		14,180
Cost of Goods Sold		7,570
Rent Expense		990
Salaries and Wages Expense		1,600
Depreciation Expense		110
Income Tax Expense		0
Office Expenses		1,300

The company buys coasters from one supplier. All amounts in Accounts Payable on December 1 are owed to that supplier. The inventory on December 1 consisted of 1,000 coasters, all of which were purchased in a batch on July 10 at a unit cost of $0.50. College Coasters records its inventory using perpetual inventory accounts and the FIFO cost flow method.

During December, the company entered into the following transactions. Some of these transactions are explained in greater detail below.

  

1. Purchased 400 coasters on account from the regular supplier on 12/1 at a unit cost of $0.52, with terms of n/60.
2. Purchased 1,000 coasters on account from the regular supplier on 12/2 at a unit cost of $0.55, with terms of n/60.
3. Sold 1,900 coasters on account on 12/3 at a unit price of $1.10.
4. Collected $970 from customers on account on 12/4.
5. Paid the supplier $1,380 cash on account on 12/18.
6. Paid employees $490 on 12/23, of which $300 related to work done in November and $220 was for wages up to December 22.
7. Loaded 100 coasters on a cargo ship on 12/31 to be delivered the following week to a customer in Kona, Hawaii. The sale was made FOB destination with terms of n/60.

Other relevant information includes the following at 12/31:

  

8. College Coasters has not yet recorded $190 of office expenses incurred in December on account.
9. The company estimates that the equipment depreciates at a rate of $9 per month. One month of depreciation needs to be recorded.
10. Wages for the period from December 23–31 are $100 and will be paid on January 15.
11. The $540 of Prepaid Rent relates to a six-month period ending on May 31 of next year.
12. The company incurred $700 of income tax but has made no tax payments this year.
13. No shrinkage or damage was discovered when the inventory was counted on December 31.
14. The company did not declare dividends and there were no transactions involving common stock.

General Journal Credit Date Dec 01 Debit 208 1 Inventory Accounts Payable 2 Dec 02 550 Inventory Accounts Payable 3 Dec 03 Accounts Receivable 2,090 Sales Revenue 2.090 Dec 03 Cost of Goods Sold Inventory 5 Dec 04 Cash Accounts Receivable 8 Dec 18 1,380 Accounts Payable Cash Dec 23 270 Salaries and Wages Payable Salaries and Wages Expense Cash UDHEHEBBETO BE Dec 31 No Journal Entry Required Dec 31 Office Expenses Accounts Payable Dec 31 Depreciation Expense Accumulated Depreciation-Equipment Dec 31 100 Salaries and Wages Expense Salaries and Wages Payable 12 Dec 31 8 Rent Expense Prepaid Rent 700 Income Tax Expense Income Taxes Payable Dec 31 No Journal Entry Required 15 Dec 31 No Journal Entry Required

Answer 1

Answer:

Inventory Turnover Ratio:

Inventory turnover ratio is the ratio that measures number of times inventory is sold or consumed in a given time period. It helps in measuring the efficiency of the company with respect to managing its inventory stock to generate sales and is calculated by dividing the total cost of goods sold with the average inventory during a period of time.

Formula to calculate:

Inventory Turnover Ratio = $\frac{Cost of goods sold}{Average Inventories}$

where , Average Inventories =

Opening Inventory + ClosingInventory

Now, In 3 simple steps we can calculate this ratio:

1) Determine the Cost of goods sold (COGS) from the annual income statement or income statement.

2) Calculate the cost of average inventory, by adding together the beginning inventory, that is, Opening and ending inventory, that is, Closing for single month, and divide by Two.

3) Finally divide the Cost of goods sold by average inventory.

To calculate, I have taken Cost of goods sold from income statement as $ 8553

Opening Inventory as on 1st December $ 500

Closing Inventory as on 31st December $ 500 (as mentioned in question assume the inventory $ 500 as on Jan 1 of this Year, hence it will be the closing of December 31)

Average Inventory is $\frac{ 500 + 500}{2}$ = $ 500

Inventory Turnover Ratio =$\frac{ 8553}{500}$= 17.106 or 17.11 times

The days sales of Inventory (DSI) is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales. Since there are 365 days in a year, simply divide 365 by your turnover ratio. The result is the average number of days it takes to sell through inventory.

To calculate Days to sell = $\frac{ 365}{Inventory turnover ratio}$ = $\frac{ 365}{17.11}$ = 21.33 days

Hence it indicates that the college coasters has 21 days to clear its inventory.

Basically, DSI is an inverse of inventory turnover. Higher DSI means Lower Inventory and Lower DSI means Higher Inventory.