Using ratios to make comparisons
The following accounting information pertains to Frost and Wells companies at the end of 2011. The only difference between the two companies is that Frost uses FIFO while Wells uses LIFO.
| Frost | Wells |
Cash | $ 130,000 | $ 130,000 |
Accounts receivable | 150,000 | 150,000 |
Merchandise inventory | 290,000 | 240,000 |
Accounts payable | 100,000 | 100,000 |
Cost of goods sold | 1,100,000 | 1,150,000 |
Building | 400,000 | 400,000 |
Sales | 1,800,000 | 1,800,000 |
Required
a. Compute the gross profit percentage for each company and identify the company that appears to be charging the higher prices in relation to its cost.
b. For each company, compute the inventory turnover ratio and the average days to sell inventory. Identify the company that appears to be incurring the higher inventory financing cost.
c. Explain why a company with the lower gross margin percentage has the higher inventory turnover ratio.
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