Question

Comparative Balance Sheets For 20X1 and 20X2 Year-End Year-End Assets 20X1 20X2 Current assets: Cash $ 70,000 $100,000 Accounts receivable (net) 300,000 350,000 Inventory 410,000 430,000 Prepaid expenses 50,000 30,000 Total current assets 830,000 910,000 Investments (long-term securities) 80,000 70,000 Plant and equipment 2,000,000 2,400,000 Less: Accumulated depreciation 1,000,000 1,150,000 Net plant and equipment 1,000,000 1,250,000 Total assets $1,910,000 $2,230,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 250,000 $ 440,000 Notes payable 400,000 400,000 Accrued expenses 70,000 50,000 Total current liabilities 720,000 890,000 Long-term liabilities: Bonds payable, 20X2 70,000 120,000 Total liabilities 790,000 1,010,000 Stockholders’ equity: Preferred stock, $100 par value 90,000 90,000 Common stock, $1 par value 120,000 120,000 Capital paid in excess of par 410,000 410,000 Retained earnings 500,000 600,000 Total stockholders’ equity 1,120,000 1,220,000 Total liabilities and stockholders’ equity $1,910,000 $2,230,000 _______________________________________________________________________ (The following questions apply to the Crosby Corporation, as presented in Problem 27.) 3. Perez Corporation has the following financial data for the years 20X1 and 20X2: 20X1 20X2 Sales………………………… $8,000,000 $10,000,000 Cost of goods sold…………… 6,000,000 9,000,000 Inventory…………………….. 800,000 1,000,000 a. Compute inventory turnover based on ratio number 6, Sales/Inventory, for each year. b. Compute inventory turnover based on an alternative calculation that is used by many financial analysts, Cost of goods sold/Inventory, for each year. c. What conclusions can you draw from part a and part b?

Answer 1

Solution:

Problem 27)

It is given that the sales is $8,000,000 in year 20X1 and $10,000,000 in year 20X2

COGS is $6,000,000 in year 20X1 and $9,000,000 in year 20X2

Inventory is $800,000 in year 20X1 and $1,000,000 in year 20X2

Part A )

Inventory turnover in 20X1 = Sales / Inventory = $8,000,000 / $800,000 = 10

Inventory turnover in 20X2 = Sales / Inventory = $10,000,000 / $1,000,000 = 10

Part B )

Inventory turnover in 20X1 = COGS / Inventory = $6,000,000 / $800,000 = 7.5

Inventory turnover in 20X2 = COGS / Inventory = $9,000,000 / $1,000,000 = 9

Part C )

We can draw the conclusion that the inventory turnover ratio has increased in the year 20X2 when we consider the alternative ratio of COSG / Inventory and the ratio is same when we consider Sales / Inventory ratio.