Question

Question 23 The following data are available for Martin Solutions, Inc.. Sales beginning inventory Cost of goods sold Ending inventory Year 2 $1,139,600 80 000 500,800 72,000 Year 1 $1,192,320 64.000 606,000 80,000 Determine for each year: (a) Inventory turnover: Year 2 (current) Year 1 (previous) (b) Number of days' sales in inventory. Round your answers to one Year 2 (Current) Year 1 (previous) (c) What conclusions can be drawn from these data concerning the inventories?

Answer 1

Year 2:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Average Inventory = ($80,000 + $72,000) / 2
Average Inventory = $76,000

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $500,800 / $76,000
Inventory Turnover = 6.59 times

Number of Days’ Sales in Inventory = 365 / Inventory Turnover
Number of Days’ Sales in Inventory = 365 / 6.59
Number of Days’ Sales in Inventory = 55.4 days

Year 1:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Average Inventory = ($64,000 + $80,000) / 2
Average Inventory = $72,000

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $606,000 / $72,000
Inventory Turnover = 8.42 times

Number of Days’ Sales in Inventory = 365 / Inventory Turnover
Number of Days’ Sales in Inventory = 365 / 8.42
Number of Days’ Sales in Inventory = 43.3 days

Number of days’ sales in inventory increased from Year 1 to Year 2 which indicates inefficient management of inventory during Year 2.