Homework Answers
1) Average Inventory = (Beginning inventory + Ending inventory) / 2
Year 2020: (940,000 + 1,020,000) / 2 = 980,000
Year 2021: (860,000 + 940,000) / 2 = 900,000
COGS = Beginning Inventory + Purchases -Ending Inventory
Year 2020: (940,000 + 4,340,000 - 1,020,000) = 4,260,000
Year 2021: (860,000 + 4,661,000 - 940,000) = 4,581,000
Inventory Turnover = COGS /Average Inventory
Year 2020: 4,260,000/ 980,000 = 4.3 times
Year 2021: 4,581,000 / 900,000 = 5.0 times
Days in inventory = 365/ Inventory Turnover
Year 2020: 365/4.3 = 85 days
Year 2021: 365/5.0 = 73 days
2) In 2021 inventory turnover is approximately 16.27% [(5.0 - 4.3) ÷ 4.3] higher than in year 2020. In addition, in 2021 days in inventory is 14.12% [(85-73) ÷ 85] lower. In 2020 the company prefers to maintain as high an inventory turnover as possible. Thus can conclude that Year 2021 manages inventory more effectively than Year 2019
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