Question

Question 2 The following information is available for Hamm Company for 2020. Hamm uses the LIFO inventory method. Beginning inventory $600,000 Ending inventory 700,000 Beginning LIFO reserve 200,000 Ending LIFO reserve 300,000 Cost of goods sold 5,460,000 Sales 8,000,000 1. Calculate the inventory turnover ratio and days in inventory for Hamm Company based on LIFO. 2. Calculate the inventory turnover ratio and days in inventory after adjusting for the LIFO reserve.

Answer 1

	1.Based on LIFO
	Inventory Turnover ratio =COGS / Average Inventory balance
	Average Inventory =(Opening balance + Closing balance)/2
	Average Inventory =($600,000 + $700,000) / 2 =$650,000
	Inventory Turnover ratio =$5,460,000/$650,000 =8.4 times
	Days in inventory =365 days / Inventory Turnover ratio
	Days in inventory =365 days / 8.4 times =43.5 days or 43 days
	2.Based on LIFO reserve
	Inventory Turnover ratio =COGS / Average Inventory balance
	Average Inventory =(Opening balance + Closing balance)/2
	FIFO Reserve =LIFO Inventory+LIFO Reserve
	Opening Balance =$600,000+$200,000 =$800,000
	Closing Balance =$700,000+$300,000 =$1,000,000
	Average Inventory =($800,000 + $1,000,000) / 2 =$900,000
	Inventory Turnover ratio =$5,460,000/$900,000 =6.07 times
	Days in inventory =365 days / Inventory Turnover ratio
	Days in inventory =365 days / 6.07 times =60.1 days or 60 days