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The Slumber Store (TSS) is a national wholesaler of beds, mattresses, pillows, and sheets.

Key totals from TSS’s most recent and forecasted financial statements are presented in the table below.

From the income statement		Last Year				This Year				Next Year
Sales Revenue		$	560,000			$	615,000			$	770,000
Cost of Goods Sold			346,500				405,250				556,300
Gross Profit			213,500				209,750				213,700
From the balance sheet		Last Year				This Year				Next Year
Inventories		$	88,000			$	101,808			$	179,825

Required:
1. Use the financial statement totals to compute the company’s actual inventory turnover ratio for this year and its forecasted inventory turnover ratio for next year. Also compute the days-to-sell for this year (actual) and next year (forecasted). Is inventory turnover expected to improve or worsen next year?
2. Use the financial statement totals to compute the company’s actual gross profit percentage for this year and its forecasted gross profit percentage for next year. Is the gross profit percentage expected to improve or worsen next year?

Use the financial statement totals to compute the company’s actual inventory turnover ratio for this year and its forecasted inventory turnover ratio for next year. Also compute the days-to-sell for this year (actual) and next year (forecasted). Is inventory turnover expected to improve or worsen next year? (Round your answers to 2 decimal places).

	Inventory turnover this year Inventory turnover next year Inventory days-to-sell this year Inventory days-to-sell next year Is inventory turnover expected to improve or worsen next year?

Use the financial statement totals to compute the company’s actual gross profit percentage for this year and its forecasted gross profit percentage for next year. Is the gross profit percentage expected to improve or worsen next year? (Round your answers to 4 decimal places)

	Gross profit percentage this year Gross profit percentage next year Is the gross profit percentage expected to improve or worsen next year?

Answer 1

1)

Inventory turnover ratio =	Cost of goods sold / Average inventory
Inventory days-to-sell =	365/ Inventory turnover ratio

Average inventory = (Opening inventory + Closing Inventory) / 2

Inventory turnover this year = $ 405,250 / (( 88,000 + 101,808) / 2 )

= 4.27 times

Inventory turnover next year = $ 556,300 / ((101,808 + 179,825) / 2)

= 3.95 times

Inventory days-to-sell this year = 365 / 4.27

= 85.48 days

Inventory days-to-sell next year = 365 / 3.95

= 92.40 days

Inventory turnover ratio, shows how many times the entire inventory of a company has been sold during an accounting period. A higher inventory turnover ratio is good which means more of the inventory is sold i.e. more sales and more sales means more profit.

As inventory turnover is expected to decreases in next year so inventory turnover is expected to worsen next year.

2) Gross profit percentage = (Gross Profit / Net Sales ) * 100

Gross profit percentage this year = ($ 209,750 / 615,000) * 100

= 34.1057%

Gross profit percentage next year = ($ 213,700 / 770,000) * 100

= 27.7532%

Gross profit percentage shows gross profit earned on every $ 100 sale. Higher gross profit percentage is good as it shows higher gross profit earned on sales.

As gross profit percentage is expected to decrease in the next year so the gross profit percentage is expected to worsen next year.